Special audit, Arizona Works pilot program report to the Arizona Legislature

              State of Arizona
Office
of the
Auditor General
SPECIAL AUDIT
Report to the Arizona Legislature
By Debra K. Davenport
Auditor General
ARIZONA WORKS
PILOT
PROGRAM
January 2002
Report No. 02-01
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee
composed of five senators and five representatives. Her mission is to provide independent and impar-tial
information and specific recommendations to improve the operations of state and local government
entities. To this end, she provides financial audits and accounting services to the state and political
subdivisions and performance audits of state agencies and the programs they administer.
The Joint Legislative Audit Committee
Representative Roberta L. Voss, Chairman
Senator Ken Bennett, Vice Chairman
Senator Herb Guenther Representative Robert Blendu
Senator Dean Martin Representative Gabrielle Giffords
Senator Peter Rios Representative Barbara Leff
Senator Tom Smith Representative James Sedillo
Senator Randall Gnant (ex-officio) Representative James Weiers (ex-officio)
Audit Staff
William Shepard—Manager
and Contact Person (602) 553-0333
Steven Montague—Team Leader
Suzanne Marette—Team Member
Michael Lamb— Team Member
Margaret Burch— Team Member
Jason Wolfe— Team Member
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2910 NORTH 44 th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602 ) 553-0333 • FAX (602) 553 -0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
January 25, 2002
Members of the Arizona Legislature
The Honorable Jane Dee Hull, Governor
Members of the Arizona Works Agency Procurement Board
Transmitted herewith is a report of the Auditor General, an audit of the Arizona Works pilot
program pursuant to Arizona Revised Statutes (A.R.S.) §46-342.01. This audit was conducted
under the authority vested in the Auditor General by A.R.S. §41-1279 et seq. I am also
transmitting with this report a copy of the Report Highlights for this audit to provide a quick
summary for your convenience.
As outlined in its response, the Arizona Works Agency Procurement Board (Board) was
unable to reach an agreement regarding the first finding. In addition, both recommendations
are contingent upon the Legislature continuing the program. The Board will implement three
of the four recommendations from the second finding, but notes that it will not be able to
unilaterally amend the contract to implement the fourth recommendation.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on January 28, 2002.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
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OFFICE OF THE AUDITOR GENERAL
SUMMARY
The Office of the Auditor General has conducted an audit of the
Arizona Works pilot program pursuant to Arizona Revised Stat-utes
(A.R.S.) §46-342.01. This audit was conducted under the au-thority
vested in the Auditor General by A.R.S. §41-1279 et seq.
Laws 1997, Chapter 300 and Laws 1998, Chapter 211 established
the Arizona Works pilot program (pilot program). The pilot pro-gram
is a 4-year, two-phase project that was created to determine
the feasibility of privatizing public assistance administration.
Phase I of the pilot program currently operates in a portion of the
metropolitan Phoenix area (hereafter referred to as the pilot
area). Phase II, which has yet to be implemented, will expand the
pilot program into a rural area. The Arizona Works Agency Pro-curement
Board (Board) was charged by statute with establish-ing
the pilot program and continues to oversee it. The pilot pro-gram
is operated by a private contractor and replaces the De-partment
of Economic Security’s (DES) EMPOWER Redesign
public assistance program in the pilot area.
Pilot Program Has Not Met Goal
of Reducing Administrative Costs
(See pages 11 through 16)
The pilot program is required by statute to save a minimum of 10
percent in administrative expenses when compared to the esti-mated
cost of running EMPOWER Redesign in the same area.
When the pilot program was created, the Board worked with the
Joint Legislative Budget Committee (JLBC) staff and DES to de-velop
formulas to calculate payments to the contractor that
would be 90 percent or less than DES’ estimated cost. Addition-ally,
the formulas calculate incentive payments made to the con-tractor
for meeting performance targets. However, the pilot pro-gram’s
costs were actually higher than the estimated cost of op-erating
EMPOWER Redesign. For example, in fiscal year 2001,
the total amount paid to the contractor was approximately $1.4
million, or 34 percent, more than EMPOWER Redesign’s esti-mated
costs.
Costs higher than DES’
estimated costs.
Summary
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OFFICE OF THE AUDITOR GENERAL
Program costs were higher because contractor payments were
not reduced to reflect two federal decisions that impacted the pi-lot
program’s scope and operation. First, when the pilot program
was originally conceived, the contractor was to perform eligibil-ity
and benefit assessments for the Temporary Assistance for
Needy Families (TANF) program and the Food Stamp and Ari-zona
Health Care Cost Containment System (AHCCCS) pro-grams
as well. However, the federal government denied Ari-zona’s
request to allow a private contractor to conduct the eligi-bility
and benefit assessments for the Food Stamp and AHCCCS
programs. The contractor then contracted back with DES to con-duct
these functions and the contractor’s guaranteed payment
was reduced accordingly. However, the incentive payment was
not similarly reduced. Although our legal analysis found that the
incentive payment formula could have been revised, the Board
did not change the incentive payment formula. Not changing the
formula, however, contributed to the program’s failure to
achieve the mandated 10 percent savings. For example, the in-centive
payment in 2000 was over $1,076,000. If the incentive
payment formula had been adjusted to reflect the exclusion of
the Food Stamps and AHCCCS functions it would have been
approximately $500,000.
Second, the original pilot program’s estimated cost reflected
DES’ previous practice of allocating certain Food Stamp and
AHCCCS costs to the TANF program. Prior to the pilot program,
DES was able to charge caseworker salaries to the TANF pro-gram
even though some caseworkers were also performing eli-gibility
and benefit assessments for the Food Stamp and
AHCCCS programs. The federal government now requires that
program costs be allocated to the benefiting individual pro-grams.
Therefore, these costs should have been removed from
the contract payment formulas and the contractor payments re-duced
accordingly. DES attempted to negotiate an amendment
to the contract to resolve this problem in 2001; however, the con-tract
was not amended until 2002.
Beyond the amount paid to the contractor, DES is also incurring
additional administrative costs related to the pilot program. DES
Payments were not re-duced
after changes in
program scope.
Summary
iii
OFFICE OF THE AUDITOR GENERAL
has contract administration responsibilities, which include com-pliance
reviews and other monitoring tasks. In addition, as of
fiscal year 2002, DES is responsible for providing administrative
assistance to the Board. Although a private contractor previously
provided this service for approximately $300,000 per year, DES
has received no funding. Finally, DES continues to conduct Food
Stamp and AHCCCS eligibility and benefit assessments for cli-ents
in the pilot area because the federal government did not al-low
the contractor to provide these services. This has caused in-efficiencies
and some duplication of effort for DES and the
contractor.
If the pilot program is continued beyond its statutory end date,
changes are needed in the payment formula so that the State can
achieve the intended savings. In addition, the Board should en-sure
the formulas: 1) are calculated using the most recent budget
cost estimates and expenditures; 2) take into account changes in
client caseload; and 3) are appropriately documented.
Contractor Performance Could
Be Difficult To Measure Due To
Recordkeeping Problems
DES Identified
(See pages 17 through 20)
Two DES reviews of the contractor’s records identified problems
that could potentially impact contract incentive payments and
the ability to document compliance with federal requirements.
The contractor must prepare and maintain records regarding cli-ent
employment and job training activities. These records are
needed to document the program’s compliance with federal re-quirements
governing public assistance programs. The records
also serve as a basis for demonstrating client compliance with
program requirements as well as documenting the contractor’s
efforts toward meeting its performance targets. However, DES
has identified problems with the contractor’s records in two re-cent
contract compliance reviews. Problems included a lack of
documentation regarding hours that clients worked, why clients
were not being sanctioned for not working or participating in job
training activities, and whether client employment was verified.
DES found records were
incomplete regarding
client employment.
Summary
iv
OFFICE OF THE AUDITOR GENERAL
DES should continue its contract monitoring, but additional
oversight is needed. The Board should require the contractor to
improve its recordkeeping because incomplete records can po-tentially
have a number of negative consequences. Specifically:
¾ DES may make inappropriate performance incentive pay-ments
if basing these payments on incomplete or inaccurate
records.
¾ Clients may not receive services they need or may not be
sanctioned for nonparticipation in work-required activities.
Other Pertinent Information
(See pages 21 through 22)
During the audit, other pertinent information was collected re-garding
the delay in implementing Phase II of the Arizona
Works pilot program. By statute, Phase II should have been im-plemented
by April 1, 2001. Although the Board initially selected
Mohave County as the site for Phase II in June 2000, conflicts
over contract cost negotiations delayed implementation. Eventu-ally,
these conflicts and delays led the Board to reverse its deci-sion
and to vote against the Mohave County site in October 2001.
The Board then had to restart the process to select another site. In
December 2001 the Board selected Greenlee County as the site
for Phase II.
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OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS
Page
Introduction and Background.......................... 1
Finding I: Pilot Program Has
Not Met Goal of Reducing
Administrative Costs.................................... 11
Because Payment Formulas Not Adjusted,
Pilot Program Costs Exceed DES’ Estimated Costs....... 11
DES Has Additional Costs
and Administrative Overlap .......................................... 14
Additional Payment Formula
Issues Also Need To Be Addressed................................ 15
Recommendations .......................................................... 16
Finding II: Contractor Performance
Could Be Difficult To Measure
Due To Recordkeeping Problems
DES Identified............................................... 17
DES Identified Problems with
Contractor Records ......................................................... 17
Negative Impacts Can Result
from Poor Recordkeeping............................................... 18
Additional Oversight Needed........................................ 19
Recommendations .......................................................... 20
Other Pertinent Information.............................. 21
Agency Response
Table of Contents
vi
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS (Concl’d)
Page
Figure and Tables
Figure 1 Arizona Works Pilot Program
Phase I Pilot Area
As of November 30, 2001.............................. 2
Table 1 Arizona Works Pilot Program
Schedule of Revenues and Expenditures
Years Ended or Ending June 30, 2000
through 2002 (Unaudited)............................ 7
Table 2 Arizona Works Pilot Program
Comparison of Contract
Payments vs. Estimated
Department of Economic Security Costs
Years Ended or Ending June 30, 1999
through 2002.................................................. 13
1
OFFICE OF THE AUDITOR GENERAL
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted an audit of the
Arizona Works pilot program pursuant to Arizona Revised Stat-utes
(A.R.S.) §46-342.01. This audit was conducted under the au-thority
vested in the Auditor General by A.R.S. §41-1279 et seq.
Arizona Works Pilot Program
Laws 1997, Chapter 300 and Laws 1998, Chapter 211 established
the Arizona Works pilot program (pilot program). The 4-year,
two-phase pilot program was created to determine the feasibility
of privatizing public assistance administration in the State of
Arizona. Phase I of the pilot program currently operates in a por-tion
of the metropolitan Phoenix area (hereafter referred to as the
pilot area) (see Figure 1, page 2). Phase II, which has yet to be
implemented, will expand the pilot program into a rural area.
In the pilot area, the pilot program replaced the Department of
Economic Security’s (DES) EMPOWER Redesign public assis-tance
program. DES continues to
administer EMPOWER Redesign in
the remainder of the State. Both Ari-zona
Works and EMPOWER Redes-ign
are part of the national welfare
reform trend to increase client self-sufficiency
through employment
and training. However, Arizona
Works has several features that dif-fer
from EMPOWER Redesign.
These include the following:
¾ It is operated by a private contractor.
¾ It is required by statute to save a minimum of 10 percent in
administrative costs as compared to what DES would likely
spend in operating EMPOWER Redesign in the same area.
Program Benefits
Families eligible for the Ari-zona
Works program can
receive:
¾ Cash assistance from
$350 to $390 per month;
¾ Job training;
¾ Job placement assis-tance;
and
¾ Childcare assistance.
Introduction and Background
2
OFFICE OF THE AUDITOR GENERAL
Figure 1
Arizona Works Pilot Program
Phase I Pilot Area
As of November 30, 2001
Source: Arizona State Land Department Geographic Information System.
Introduction and Background
3
OFFICE OF THE AUDITOR GENERAL
n It has provisions for payment incentives and penalties to help
ensure the contractor meets performance goals.
¾ It includes more stringent work requirements for public as-sistance
recipients because fewer activities qualify as work.
The first phase of the pilot program began on April 1, 1999, and
will continue through December 31, 2002. The pilot area accounts
for approximately 13 percent of the State’s households that re-ceive
benefits and services under Temporary Assistance for
Needy Families (TANF), a federally mandated program that
provides much of the funding for the pilot program. Phase II of
the pilot program was to begin in April 2001, but as of December
2001, it had not been implemented for a number of reasons (see
Other Pertinent Information, pages 21 through 22).
Federal Decision Impacted
Pilot Program Implementation
The State was not able to implement the pilot program as origi-nally
proposed. The enabling legislation called for the State to
contract with a private contrac-tor
to operate public assistance
programs such as TANF, Food
Stamps, and the Arizona
Health Care Cost Containment
System (AHCCCS). Because
these are federal programs, the
federal government must ap-prove
a state’s request to oper-ate
the programs in a manner
that contradicts the programs’
federal requirements. In this
case, the federal government
denied Arizona’s request to
allow a private contractor to
conduct eligibility and benefit assessments for the Food Stamp
and AHCCCS programs. As a result, the contractor is now only
responsible for eligibility and benefit assessments for TANF,
childcare assistance for TANF-eligible clients, and state-funded
general assistance. The contractor is also responsible for TANF
Due to the federal refusal to allow
the contra ctor to conduct Food
Stamp and AHCCCS assessments,
both the contractor and DES per-form
the following tasks to oper-ate
public assistance programs in
the pilot area:
¾ Determining whether clients
are eligible for the program;
¾ Assessing client needs and
determining appropriate ben -
efits and services; and
¾ Monitoring client progress.
Federal waiver denial re-sulted
in inefficiencies and
duplication of effort.
Introduction and Background
4
OFFICE OF THE AUDITOR GENERAL
clients’ job training and placement. DES continues to perform
eligibility and benefit assessments for Food Stamps, AHCCCS,
and non-TANF childcare programs in the pilot area.
Key Agencies and Their
Pilot Program Responsibilities
The pilot program has a complex administrative structure that
includes four primary parties involved in its establishment and
administration:
¾ Arizona Works Agency Procurement Board (Board)—The
nine-member Board is appointed by the Governor and con-sists
of the DES director, two private-sector members with
procurement experience, two community-based organization
members, two representatives of a major employer in the
State, and two small business representatives. The Board’s re-sponsibilities
include overseeing implementation of the pilot
program, selecting the contractor, overseeing contracted
evaluations of the pilot program, monitoring pilot program
implementation, and mediating any contract issues between
DES and the contractor. The Board initially received adminis-trative
support from a private contractor for approximately
$300,000 per year. However, in fiscal year 2002, DES assumed
the administrative support function for the Board.
¾ MAXIMUS, Inc.—MAXIMUS, Inc., the contractor selected to
operate the pilot program, is a firm with experience in the
administration of various aspects of public assistance pro-grams
throughout the United States. It is responsible for op-erating
the pilot program according to statute and contract
requirements. Requirements include submitting monthly
billings to DES and bimonthly progress reports to DES and
the Joint Legislative Budget Committee (JLBC).
¾ Department of Economic Security—DES has retained a
number of responsibilities related to the pilot program, such
as the administration and distribution of benefit and client
support service payments for the pilot area, providing com-puter
services and support for the contractor, processing
benefit appeals, and performing client fraud and abuse spe-
Introduction and Background
5
OFFICE OF THE AUDITOR GENERAL
cial investigations when necessary. Additional responsibili-ties
include assisting JLBC staff in developing the original
baseline cost estimate used to establish pilot program fund-ing,
making payments to the contractor, monitoring the con-tract
to ensure state and federal program compliance, and as-suming
all administrative support functions for the Board as
of July 2001.
¾ Joint Legislative Budget Committee and its staff—The
JLBC and its staff have responsibilities associated with pilot
program costs and evaluations. The JLBC staff develops, and
the JLBC has the statutory responsibility to approve the
original baseline cost estimate for the pilot area. Other JLBC
responsibilities include determining the cash benefit savings
attributable to caseload reduction, evaluating the pilot pro-gram’s
fiscal and performance impacts, reviewing bimonthly
program reports submitted by the contractor, and making
recommendations to the Legislature and Board regarding
program performance.
Contract Process and
Payment Formulas
In order to implement the pilot-program-enabling legislation, the
Board issued a Request for Proposal (RFP) in August 1998. This
RFP included payment formulas developed to implement the
statutory 10 percent savings requirement. To create these formu-las,
the Board worked with DES and JLBC staff to establish a
baseline cost estimate for DES to operate EMPOWER Redesign
in the pilot area. This baseline cost estimate included factors such
as client caseload and estimated direct and indirect DES costs. In
order to achieve the mandated savings and provide incentive
payments, the Board devised the following payment structure:
¾ First, the contractor receives a guaranteed payment. This
guaranteed amount is approximately 80 percent of the base-line
cost estimate. The contractor bid this amount for the con-tract.
¾ Second, the contractor may earn incentive payments. These
incentive payments are earned when the contractor success-
Introduction and Background
6
OFFICE OF THE AUDITOR GENERAL
fully fulfills established performance measures, such as ex-ceeding
EMPOWER Redesign job placements by 30 percent.
In the first year of the contract, the amount available for in-centives
was the difference between the contractor’s bid and
the baseline cost estimate. In subsequent years, incentives
were reduced to the difference between the bid and 90 per-cent
of the baseline cost estimate.
¾ Finally, the contractor can receive caseload reduction pay-ments
that are not included as part of the 90 percent statutory
cap. The contractor can receive up to 25 percent of the State’s
caseload reduction savings that are attributable to the pilot
program. JLBC staff calculates this amount annually.
The contractor was awarded a multi-year contract in January
1999 for both Phase I and Phase II of the pilot program. During
the term of the contract, DES is responsible for notifying the con-tractor
and the Board of any changes in available funding or
scope of work. The contractor has 30 days to respond to pro-posed
changes. Any changes to the contract are negotiated be-tween
the contractor, DES, and the Board, and are approved by
the Board.
Budget
The pilot program is primarily funded with TANF, Child Care
and Development Block Grant, and State General Fund monies.
Total contract payments for fiscal year 2001 were slightly more
than $6 million. Table 1 (see page 7) illustrates the pilot pro-gram’s
actual and estimated revenues and expenditures for fiscal
years 2000 through 2002.
Previous Pilot Program Reviews
The Board has contracted with an independent evaluator (Abt
Associates) to conduct evaluations of the pilot program each
program year. As of December 2001, the evaluator has com-pleted
two evaluations. A third study is expected to be released
Introduction and Background
7
OFFICE OF THE AUDITOR GENERAL
Table 1
Arizona Works Pilot Program
Schedule of Revenues and Expenditures1
Years Ended or Ending June 30, 2000 through 2002
(Unaudited)
2000
(Actual)
2001
(Actual)
2002
(Estimated)
Revenues:
State General Fund appropriations 2 $ 367,300 $ 363,064 $ 43,000
Temporary Assistance for Needy Families Grant 4,921,865 5,082,418 4,206,200
Child Care and Development Block Grant 688,023 593,751 404,800
Other 10,687 7,300
Total revenues 5,977,188 6,049,920 4,661,300
Expenditures:
Contract payments to MAXIMUS, Inc.: 3
Guaranteed administrative payments 4,600,695 4,624,368 3,152,700
Incentive payments:
Administrative savings 4 1,076,493 1,111,000 1,508,600
Caseload reduction savings 14,552
Contract payments to Fox Systems, Inc. 2 300,000 299,139
Total expenditures 5,977,188 6,049,059 4,661,300
Excess of revenues over (under) expenditures $ 0 $ 861 $ 0
1 The schedule presents amounts related to contractor payments. It does not include benefit payments or Department of
Economic Security (DES) administrative costs. For example, DES has retained a number of pilot-program-related
responsibilities, such as administrating and distributing benefit and client support service payments for the pilot area. DES
also assumed responsibilities such as contract negotiations and monitoring.
2 In 2000 and 2001, DES was appropriated $300,000 from the State General Fund to pay for administrative and technical
assistance to the Arizona Works Agency Procurement Board. However, the appropriation was discontinued for 2002, and
DES became responsible for assisting the Board.
3 MAXIMUS, Inc. earns guaranteed administrative payments, which are the base contract amounts for administering the
pilot program. MAXIMUS, Inc. also receives incentive payments for meeting established performance measures for
administrative and caseload reduction savings.
4 As of November 30, 2001, administrative incentives earned had not been calculated or paid for the last quarter of fiscal year
2001, or for fiscal year 2002. Amounts were estimated based on the administrative incentives the contractor earned in 1999
and 2000.
Source: Auditor General staff analysis of the State of Arizona Appropriations Report and various reports of the Arizona
Department of Economic Security Financial Management Control System for the years ended June 30, 2000 and
2001; and DES estimates of financial activity for the year ending June 30, 2002, as of November 30, 2001.
Introduction and Background
8
OFFICE OF THE AUDITOR GENERAL
in January 2002. The first study, entitled “Evaluation of the Arizona
Works Pilot Program—Process Study Interim Report,” was issued in
January 2001. It evaluated the implementation of the pilot pro-gram
from April 1, 1999 through June 30, 2000. It addressed five
major topics, including: 1) planning and start-up activities; 2) or-ganization
and staffing; 3) intake and benefit determination; 4)
employment, training, and support services; and 5) perceptions
of staff, employers, and service providers. Overall, the study in-dicated
that the contractor had successfully implemented the pi-lot
program.
The second study, entitled “Evaluation of the Arizona Works Pilot
Program—Impact Study Interim Report,” was issued in February
2001. It evaluated the performance of the pilot program com-pared
with the DES-administered EMPOWER Redesign pro-gram.
The study compared a large number of participants en-rolled
in each program. The study determined that there were no
significant differences between the pilot program and
EMPOWER Redesign in increasing earned income or reducing
reliance on assistance.
Scope, Limitations,
and Methodology
This audit focused primarily on two areas—the extent of admin-istrative
cost savings under the pilot program and the impact of
poor contractor recordkeeping as identified by DES. This focus
was chosen to avoid replicating previous pilot program per-formance
evaluations. This audit includes findings and recom-mendations
as follows:
¾ The pilot program has not met its goal of reducing adminis-trative
costs (see Finding I, pages 11 through 16); and
¾ The need for additional Board oversight of contractor re-cordkeeping
(see Finding II, pages 17 through 20).
This report also includes an Other Pertinent Information section
(see pages 21 through 22) that provides information regarding
the delay in implementing Phase II of the Arizona Works pilot
program.
Introduction and Background
9
OFFICE OF THE AUDITOR GENERAL
Throughout the audit, Auditor General staff encountered a
number of limitations in determining how the baseline cost esti-mate
was established. Key DES staff who had assisted in devel-oping
the original baseline cost estimate were no longer at DES.
Auditor General staff also encountered inadequate documenta-tion
of amounts used to calculate the baseline cost estimate, pri-marily
the costs related to tasks retained by DES and caseload
percentages. As a result, auditors were unable to verify all the
amounts used in the original baseline cost estimate.
This audit used a variety of methods to study the issues ad-dressed
in the report. Specifically:
¾ To determine whether pilot program costs and baseline
cost estimates were appropriate—auditors interviewed
Board staff, DES staff, and JLBC staff; reviewed statutes, the
pilot program contract, previous pilot program reviews,
JLBC appropriations reports and budget development work-sheets,
DES funding plans, appropriations transfers, expendi-ture
information, and financial reports from DES’ Financial
Management Control System; and reconciled contractor
payments to the contract and contractor billings.
¾ To determine the impact of contractor recordkeeping
problems identified by DES—auditors reviewed the pilot
program contract, applicable federal laws and regulations,
and policies and procedures for DES’ Office of Audit and
Management Services; interviewed DES internal audit staff;
evaluated the competence and objectivity of the internal au-dit
work; and examined internal audit reports and working
papers.
¾ To determine the status of Phase II of the Arizona Works
pilot program—auditors reviewed Board meeting minutes
and the proposed contract amendments, and interviewed
DES and Board staff.
The Auditor General and staff express appreciation to the mem-bers
of the Arizona Works Agency Procurement Board, JLBC
staff, and DES staff for their assistance and cooperation through-out
the audit.
Baseline cost estimate
inadequately docu-mented.
10
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(This Page Intentionally Left Blank)
11
OFFICE OF THE AUDITOR GENERAL
FINDING I PILOT PROGRAM HAS NOT
MET GOAL OF REDUCING
ADMINISTRATIVE COSTS
The pilot program has cost more to operate each year than the
estimated cost to operate EMPOWER Redesign. This happened
because contractor payments were not sufficiently reduced to
reflect federal decisions that impacted the pilot program’s scope
and operation. Beyond the amount paid to the contractor, DES is
also incurring administrative costs and continues to service cli-ents
in the pilot area. If the pilot program is continued, the pay-ment
calculations should be changed to ensure the pilot program
can meet its cost savings goal.
Because Payment Formulas
Not Adjusted, Pilot Program Costs
Exceed DES’ Estimated Costs
Although the pilot program was required to cut administrative
costs by at least 10 percent compared to DES’ EMPOWER Redes-ign
program, it has been more costly. For example, in fiscal year
2001, the pilot program cost over 34 percent more than the esti-mated
cost to operate EMPOWER Redesign due to payment
formulas that did not reflect federal decisions that reduced the
contractor’s scope of work.
Pilot program has cost more—By statute, the pilot program’s
operating expenses must be at least 10 percent less than what
DES’ estimated operating costs (baseline cost estimate) would be
in carrying out the EMPOWER Redesign program in the pilot
area. The amount of the contractor’s bid was about 80 percent of
DES’ estimated administrative cost. Under the contract, this was
the contractor’s guaranteed payment. However, the contract con-tained
a provision allowing the contractor to receive incentive
payments for meeting established performance measures, such
Not adjusting payment
formulas for federal deci-sions
caused the program
to not reach savings re-quirement.
Finding I
12
OFFICE OF THE AUDITOR GENERAL
as exceeding EMPOWER Redesign job placements by 30 percent.
After the first year, this incentive payment could raise the total
contract payment to no more than 90 percent of DES’ estimated
administrative costs.
The pilot program did not meet its savings goal. As shown in
Table 2 (see page 13), in each year of operation, the pilot program
cost more than DES’ estimated cost to operate EMPOWER Re-design.
For example, in fiscal year 2001, the pilot program cost
$1.4 million more than DES’ estimated costs.
Savings goal exceeded because payment formulas not adjusted
to reflect federal decisions—The failure to meet the mandated
savings was primarily the result of the contract payment formu-las
not being changed to reflect two decisions made by the fed-eral
government. Specifically,
¾ Administrative incentive payments not reduced to reflect
narrowed contract scope—The incentive payment formula
was not amended to reflect the contractor’s reduced scope of
work. As noted previously, under the proposal for the pilot
program, the contractor was to perform eligibility and benefit
assessments for TANF, childcare assistance for TANF-eligible
clients, state-funded general assistance, Food Stamps, and
AHCCCS. However, the federal government denied Ari-zona’s
request to allow a private contractor to determine eli-gibility
and benefits for Food Stamps and AHCCCS. The con-tractor
then contracted back with DES to conduct these func-tions
and the contractor’s guaranteed payment was reduced
accordingly. However, the incentive payment was not simi-larly
reduced. Although our legal analysis found that the in-centive
payment formula could have been revised, the Board
did not change the incentive payment formula. Not changing
the formula, however, contributed to the program’s failure to
achieve the mandated 10 percent savings. For example, the
incentive payment in 2000 was over $1,076,000. If the incen-tive
payment formula had been adjusted to reflect the exclu-sion
of the Food Stamps and AHCCCS functions it would
have been approximately $500,000.
2001 contract payments
exceeded estimated DES
costs by $1.4 million.
Finding I
13
OFFICE OF THE AUDITOR GENERAL
Table 2
Arizona Works Pilot Program
Comparison of Contract Payments vs. Estimated
Department of Economic Security Costs
Years Ended or Ending June 30, 1999 through 2002
19991 2000 2001 20022
Contract payment to MAXIMUS, Inc.:
Guaranteed administrative payments $1,114,530 $4,600,695 $4,624,368 $3,152,700
Incentive payments for administrative
savings 3 490,985 1,076,493 1,111,000 1,508,600
Total contractor payments 1,605,515 5,677,188 5,735,368 4,661,300
Estimated cost for DES to administer
the program4 1,520,000 4,129,300 4,283,600 4,359,700
Payments greater than estimated cost 5 $ 85,515 $1,547,888 $1,451,768 $ 301,600
Percentage of payments more than
estimated cost 6% 37% 34% 7%
1 The pilot program began on April 1, 1999, and operated for only 3 months in fiscal year 1999.
2 The significant decreases in contractor payments, payments greater than estimated costs, and percentage of
payments more than estimated costs are caused by the contract’s recognition of the change in cost allocation
procedure required by the federal government.
3 As of November 30, 2001, administrative incentives earned had not been calculated or paid for the last quarter of
fiscal year 2001, or for fiscal year 2002. Amounts were estimated based on the administrative incentives the
contractor earned in 1999 and 2000.
4 Consists of estimates associated with activities performed by the contractor for TANF, childcare assistance for
TANF-eligible clients, and state-funded general assistance. The estimate does not include DES’ costs to administer
the Food Stamp and AHCCCS programs in the pilot area.
5 The contractor payments greater than DES estimated costs for 2000 and 2001 would have been lower if the contract
had been modified for the change in cost allocation procedure and denial of Arizona’s waiver request.
Source: Auditor General staff analysis of the pilot program contract and supporting baseline cost estimates of the
Arizona Department of Economic Security for the years ended or ending June 30, 1999 through 2002;
contractor payments recorded on the Arizona Department of Economic Security Financial Management
Control System for the years ended June 30, 1999 through 2001; and DES estimates for the year ending June
30, 2002, as of November 30, 2001.
Finding I
14
OFFICE OF THE AUDITOR GENERAL
¾ Payments not reduced to reflect shift in cost allocation—
Before the pilot program began, DES followed a practice of
charging caseworker salaries to TANF, although these case-workers
may have administered other federal programs,
including Food Stamps and AHCCCS. While the former Aid
to Families with Dependent Children (AFDC) program
allowed such an exception, the TANF legislation that
replaced AFDC did not. Federal regulations require that costs
be allocated to all benefiting programs based on the relative
benefits derived by each program. Enforcing this
requirement, which began in fiscal year 2000, reduced ad-ministrative
costs that could be charged to the pilot program.
This is because a portion of these costs now had to be
allocated to Food Stamps and AHCCCS, functions that the
federal government would not allow a private contractor to
administer. Although the contract payment formulas should
have been reduced to reflect this change, no changes were
made in contract years 2000 and 2001. DES unsuccessfully
attempted to negotiate an amendment to the 2001 contract to
correct this error. There was such an amendment to the 2002
contract.
DES Has Additional Costs
and Administrative Overlap
There are further costs and inefficiencies related to the pilot pro-gram
in addition to the payment issues described previously.
DES bears additional costs in support and oversight associated
with the pilot program contract and the Board. Further, because
DES had to retain some of the administrative duties for clients
being served under the pilot program, there are continued ad-ministrative
costs and inefficiencies.
DES has additional administrative costs related to the pilot
program—DES has additional responsibilities and incurs costs
associated with the pilot program. These costs could not be fully
quantified and were not considered in the preceding cost com-parison.
For example, DES must perform contract administration
tasks such as assisting JLBC staff in developing contract baseline
cost estimates, contract negotiation, and contract monitoring.
Further, as of July 2001, DES assumed administrative support
responsibilities for the Board. A private contractor had previ-
Finding I
15
OFFICE OF THE AUDITOR GENERAL
ously provided the Board administrative support for approxi-mately
$300,000 per year. DES has received no funding to per-form
these duties.
DES continues to serve pilot program clients—Although the pi-lot
program was intended to replace DES in the pilot area, the
federal decision to not allow the contractor to conduct Food
Stamp and AHCCCS eligibility and benefit assessments has re-sulted
in a continuing DES presence. Both DES and contractor
staff must work with the same clients, which results in inefficien-cies
and some duplication of effort. For example, clients who are
eligible for TANF and Food Stamps must meet with both the
contractor’s staff and DES staff, in many cases providing the
same information, rather than working with just one caseworker
as the pilot program originally intended.
Additional Payment
Formula Issues Also
Need To Be Addressed
If the pilot program is continued beyond December 2002, the
Board and DES also need to take several payment formula con-cerns
into account in addition to addressing the major formula
errors discussed earlier. Specifically:
¾ Contract was not amended to include timely cost esti-mates—
The contract has not been amended to reflect up-to-date
cost estimates. For the fiscal year 2001 contract, DES
prepared a revised baseline cost estimate but was unable to
come to an agreement with the contractor. As a result, the fis-cal
year 2001 contract was based on the original fiscal year
1999 baseline cost estimate. Although the fiscal year 2002 con-tract
was based on more recent cost estimates, DES used fis-cal
year 2001 appropriations and fiscal year 2000 expendi-tures
rather than more current amounts that were available.
Baseline cost estimates should be revised each year using the
most recent budget and expenditure information available.
Further, because the JLBC had to approve the original base-line
cost estimates, the Board should consider presenting its
revisions to those estimates to JLBC for its approval.
Administrative overlap
causes additional costs,
inefficiencies, and duplica-tion
of effort.
Baseline cost estimates
should:
¾ Use current informa-tion;
¾ Reflect caseload
changes; and
¾ Be documented.
Finding I
16
OFFICE OF THE AUDITOR GENERAL
¾ Caseload changes not addressed in contractor pay-ment—
Although current client caseload has not fluctuated
significantly from the original client caseload, the current
funding approach does not adjust the baseline cost estimates
to reflect changes in the number of clients being served. If the
caseload were to rise, the contractor’s payment would not in-crease
to cover the additional clients. Conversely, if the
caseload were to drop, the contractor is in effect paid for cli-ents
who are no longer receiving services. The baseline cost
estimates should account for changes in caseload.
¾ Baseline cost estimate methodology not documented—
The methodology used to determine the baseline cost esti-mates
has not been adequately documented. This methodol-ogy
has been the foundation for the original contract and all
subsequent contract amendments. Although JLBC approved
the baseline cost estimate in August 1998, there was not al-ways
written documentation of the methods used and deci-sions
made to derive the estimate. Further, in some instances,
records were not kept to support the actual amounts used to
calculate the estimate. Inadequate documentation prevents
appropriate external review and analysis of the baseline cost
estimate. The Board should maintain better documentation of
the methodology and amounts used in any future baseline
cost estimates to help overcome these problems.
Recommendations
1. If the Legislature decides that the pilot program should be
continued, the Board should revise payment formulas to re-flect
the effect of federal decisions on the pilot program’s
scope and costs.
2. If the pilot program continues, the Board should:
a. Amend contracts annually to reflect current baseline cost
estimates;
b. Include caseload changes in the baseline cost estimate;
and
c. Appropriately document the methodology and amounts
used in future baseline cost estimates.
17
OFFICE OF THE AUDITOR GENERAL
FINDING II CONTRACTOR PERFORMANCE
COULD BE DIFFICULT TO
MEASURE DUE TO
RECORDKEEPING PROBLEMS
DES IDENTIFIED
DES reviews of contractor records identified problems that may
limit the ability to measure contractor performance. DES has
conducted two contract compliance reviews and determined the
contractor lacked sufficient records. Incomplete records could
potentially result in the contractor receiving inappropriate per-formance
incentive payments. Incomplete records also provide
no assurance that clients are receiving appropriate services or are
receiving cash benefits appropriately. Additional Board over-sight
is needed to address these problems.
DES Identified Problems
with Contractor Records
As required by federal laws and regulations, and as part of its
contract oversight responsibilities, DES conducted two contract-monitoring
reviews. The reviews identified substantial concerns
with the contractor’s client employment records. The contractor
must maintain records regarding client employment and job
training activities. These records are needed to be able to docu-ment
compliance with federal laws and regulations governing
public assistance programs. The records also serve as a basis for
demonstrating client compliance with program requirements as
well as documenting the contractor’s efforts toward meeting its
performance targets. The contractor maintains its own client files,
but also enters the data into the DES computer system.
The first DES review was issued in August 2000. The contractor’s
response to the review listed the actions it had taken, or planned
to take, to correct the deficiencies. However, the second review,
DES reviews found that
contractor records were
incomplete.
Finding II
18
OFFICE OF THE AUDITOR GENERAL
issued in May 2001, identified many of the same issues. The con-tractor’s
response to the second review did not list specific ac-tions
that it would take, but instead referred to its existing poli-cies
and procedures governing the issue areas.
The DES reviews found that there was not always documenta-tion
in the contractor’s client files to support the information the
contractor had recorded in the DES computer system. For exam-ple,
if the computer records indicated the client was employed,
there should be documents in the client’s file to confirm the em-ployment.
Without the necessary documents, it is impossible to
verify the accuracy of the computer records. DES identified
many instances when client files lacked the necessary documents
to support data in the computer system. In addition, the DES re-views
also found instances where the computer records were
incomplete.
Negative Impacts Can Result
from Poor Recordkeeping
Inaccurate or incomplete records lessen the likelihood that the
pilot program’s performance can be assessed reliably. This can
potentially have a number of negative consequences. Specifi-cally:
¾ Performance incentive payments may not be appropri-ate—
If contractor records are insufficient, there is no way to
confirm the accuracy of the data used to determine perform-ance
incentive payments. The contractor can receive incentive
payments if it meets any of the performance criteria relating
to client work participation. Performance goals are deter-mined
using data from DES’ computer records and the con-tractor’s
files. Therefore, if the information is wrong, the con-tractor
can be inappropriately rewarded.
¾ Clients may not be receiving appropriate services—If
contractor records are incomplete or inaccurate, there is no
proof that clients are receiving intended services or being
sanctioned when required. For example, clients may not be
Poor records can result
in improper payments
and services.
Finding II
19
OFFICE OF THE AUDITOR GENERAL
receiving needed job training. Further, if clients are not fulfilling
their work participation requirements, the State may be inap-propriately
paying benefits to clients who should be sanctioned.
Additional Oversight
Needed
Additional contract oversight should help ensure that the pro-gram
can document that it is in compliance with federal re-quirements,
that the contractor is appropriately compensated,
and that clients receive appropriate services or are sanctioned
when required. DES should continue to conduct contract moni-toring
reviews to identify any deficiencies and discrepancies in
contractor records. As part of its reviews, DES should determine
whether the records provide sufficient support for providing the
contractor incentive payments. Finally, DES should inform the
Board of the results of its reviews in a timely manner. DES did
not provide the Board with information on its monitoring re-views
until the Board’s December 2001 meeting.
For its part, the Board should require the contractor to develop
and implement a corrective action plan to address the DES find-ings.
The Board should also amend its contract to include penal-ties
for failure to maintain accurate and sufficient documenta-tion.
Finding II
20
OFFICE OF THE AUDITOR GENERAL
Recommendations
1. DES should continue regular monitoring of the contractor to
ensure appropriate documentation is kept, and report the re-sults
of its reviews to the Board in a timely manner.
2. As part of its monitoring reviews DES should determine
whether the contractor has kept sufficient records to support
incentive payments for meeting contract performance meas-ures.
3. The Board should require the contractor to develop and im-plement
corrective actions plans to address the problems
identified in the DES reviews.
4. The Board should amend the contract to include penalties for
the contractor’s failure to maintain accurate and sufficient in-formation.
21
OFFICE OF THE AUDITOR GENERAL
OTHER PERTINENT INFORMATION
During this audit, information was obtained about the status of
Phase II of the pilot program.
Board Has Experienced
Delays in Phase II Implementation
Although the Arizona Works enabling legislation called for a
second phase of the pilot program to be in place by April 1, 2001,
Phase II has not yet been implemented. A site was selected in
time to meet this requirement; however, conflicts over contract
cost negotiations delayed implementation. As a result, the Board
has had to restart the site selection process.
Statute required Phase II implementation by 2001—A.R.S. §46-
343 required that the Board select a second pilot site in a rural
area for the third and fourth year of the pilot program beginning
January 1, 2001, and allowed for a 3-month implementation pe-riod.
The Board held open meetings in prospective counties in
March 2000. The counties considered at that time were Mohave,
Pinal, and Cochise. In June 2000, the Board selected Mohave
County as the site for implementation of Phase II.
Cost issues delayed implementation—Phase II implementation
was delayed due to conflicts over costs. After the Board selected
Mohave County, a baseline cost estimate was developed for ad-ministering
the pilot program in Mohave County beginning
January 2001. However, the contractor rejected the proposed es-timate
due to compensation issues.1 DES continued to negotiate
with the contractor for the next 10 months over the proposed
baseline cost estimate and presented an amendment to the con-tractor
for Phase II in June 2001. At the July 2001 Board meeting,
the contractor accepted the amendment for Mohave County.
1 Phase II of the pilot program was awarded to MAXIMUS, Inc. as part of
the Phase I contract.
Other Pertinent Information
22
OFFICE OF THE AUDITOR GENERAL
However, the Board voted against the amendment for the fol-lowing
reasons:
1. JLBC had not officially approved the Mohave County base-line
cost estimate as required by statute.
2. There had not been an evaluation of Phase I by JLBC as re-quired
by statute.
3. The remaining time frame to implement the pilot in Mohave
County created transition issues for clients and providers and
did not provide adequate time for the statutorily required
evaluation.
New Phase II site selected—Due to its concerns caused by the
delays in attempting to implement Phase II, in October 2001 the
Board reversed its prior decision to select Mohave County. The
Board restarted its site selection process and appointed a com-mittee
to look at alternative rural counties and make a site rec-ommendation.
In December 2001, the Board selected Greenlee
County as the Phase II site.
OFFICE OF THE AUDITOR GENERAL
Agency Response
OFFICE OF THE AUDITOR GENERAL
(This Page Intentionally Left Blank)
January 22. 2002
Ms. Debbie Davenport, CPA
Office of the Auditor General
2910 North 44"' Street, Suite 410
Phoenix, AZ 85018
Dear Ms. Davenport:
The Arizona Works Agency Procurement Board (Board) wishes to thank the Office of the Auditor General for the opportunity to
respond to the recently completed audit of the Arizona Works pilot program.
The Board met on December 19,2001 and January 9,2002 to review the report and discuss the findings and recommendations.
The Board responded to each of the recommendations under Finding #1, but the Board was not able to agree on a response to
this finding. This was due, in large part, because the Joint Legislative Budget Committee has not updated the baseline and
administrative costs for the pilot program. In addition, the Board believes that it does not have the authority to act on several of
the recommendations, which should be referred to the Legislature. Enclosed is a copy of the Board's response to the report.
If you wish to discuss this further, please call me at (520)740-5205.
Sincerely,
Hank Atha
Chair
Enclosure
Note: Board responses appear in italics
FINDING I - PILOT PROGRAM HAS NOT MET GOAL OF REDUCING ADMINISTRATIVE COSTS
The Arizona Works Agency Procurement Board (Board) is not able to come to agreement on this finding.
Recommendations
1. If the Legislature decides that the pilot program should be continued, the Board should revise payment
formulas to reflect the effect of federal decisions on the pilot program's scope and costs.
The Board does not believe it has the authority to implement this recommendation. The recommendation
should be referred to the Legislature.
2. If the pilot program continues, the Board should:
a. Amend contracts annually to reflect current baseline cost estimates;
b. Include caseload changes in the baseline cost estimate; and
c. Appropriately document the methodology and amounts used in future baseline cost estimates.
The Board believes it is and has been operating under the terms of the current legislation and it does not
have the authority to make these changes. The Board will request the Department of Economic Security
(DES) and the Joint Legislative Budget Committee (JLBC) to appropriately document the methodology
and amounts used in future baseline cost estimates.
FINDING II - CONTRACTOR PERFORMANCE COULD BE DIFFICULT TO
MEASURE DUE TO RECORDKEEPING PROBLEMS DES IDENTIFIED
The Board agrees with the finding and the following recommendations will be implemented.
Recommendations
1. DES should continue regular monitoring of the contractor to ensure appropriate documentation is kept, and
report the results of its reviews to the Board in a timely manner.
The Board agrees with the recommendation. DES has assured the Board that it will continue regular
monitoring, and that results will be reported to the Board timely.
1
2. As part of its monitoring reviews DES should determine whether the contractor has kept sufficient records to
support incentive payments for meeting contract performance measures.
DES has assured the Board that it will continue to require the contractor to keep sufficient records, and that
the Board will be kept apprised of reviews.
3. The Board should require the contractor to develop and implement corrective actions plans to address the
problems identified in the DES reviews.
The Board will request the contractor and DES to work together to develop and implement corrective action
plans to address the problems identified in reviews.
4. The Board should amend the contract to include penalties for the contractor's failure to maintain accurate and
sufficient information.
The Board does not believe it has the authority, unilaterally, to amend the contract to assess such penalties.
Other Performance Audit Reports Issued Within
the Last 12 Months
01-10
Future Performance Audit Reports
Kinship Foster Care
01-1 Department of Economic Security—
Child Support Enforcement
01-2 Department of Economic Security—
Healthy Families Program
01-3 Arizona Department of Public
Safety—Drug Abuse Resistance
Education (D.A.R.E.) Program
01-4 Arizona Department of
Corrections—Human Resources
Management
01-5 Arizona Department of Public
Safety—Telecommunications
Bureau
01-6 Board of Osteopathic Examiners in
Medicine and Surgery
01-7 Arizona Department
of Corrections—Support Services
01-8 Arizona Game and Fish Commission
and Department—Wildlife
Management Program
9 Arizona Game and Fish
Commission—Heritage Fund
01-10 Department of Public Safety—
Licensing Bureau
01-11 Arizona Commission on the Arts
01-12 Board of Chiropractic Examiners
01-13 Arizona Department of
Corrections—Private Prisons
01-14 Arizona Automobile Theft
Authority
01-15 Department of Real Estate
01-16 Department of Veterans’ Services
Arizona State Veteran Home,
Veterans’ Conservatorship/
Guardianship Program, and
Veterans’ Services Program
01-17 Arizona Board of Dispensing
Opticians
01-18 Arizona Department of Correct-ions—
Administrative Services
and Information Technology
01-19 Arizona Department of Education—
Early Childhood Block Grant
01-20 Department of Public Safety—
Highway Patrol
01-21 Board of Nursing
01-22 Department of Public Safety—
Criminal Investigations Division
01-23 Department of Building and
Fire Safety
01-24 Arizona Veterans’ Service
Advisory Commission
01-25 Department of Corrections—
Arizona Correctional Industries
01-26 Department of Corrections—
Sunset Factors
01-27 Board of Regents
01-28 Department of Public Safety—
Criminal Information Services
Bureau, Access Integrity Unit, and
Fingerprint Identification Bureau
01-29 Department of Public Safety—
Sunset Factors
01-30 Family Builders Program
01-31 Perinatal Substance Abuse
Pilot Program
01-32 Homeless Youth Intervention Program
Letter Report: Department of Environmental
Quality—Fiduciary
01-33 Department of Health Services—
Behavioral Health Services
Reporting Requirements