Performance audit, Arizona Department of Transportation, Motor Vehicle Division, state revenue collection functions

              A REPORT
TO THE
ARIZONA LEGISLATURE
Debra K. Davenport
Auditor General
Arizona Department
of Transportation
Motor Vehicle Division—
State Revenue Collection Functions
Performance Audit Division
SEPTEMBER • 2004
REPORT NO. 04 – 09
Performance Audit
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 impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting servic-es
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Representative John Huppenthal, Chair Senator Robert Blendu, Vice Chair
Representative Tom Boone Senator Gabrielle Giffords
Representative Ken Clark Senator Peter Rios
Representative Ted Downing Senator Thayer Verschoor
Representative Steve Yarbrough Senator Jim Weiers
Representative Jake Flake (ex-officio) Senator Ken Bennett (ex-officio)
Audit Staff
Dale Chapman, Manager and Contact Person
Mary Edmonds Elizabeth Brandt
Kirk Jaeger Linda Robinson
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
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
September 27, 2004
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Victor M. Mendez, Director
Arizona Department of Transportation
Transmitted herewith is a report of the Auditor General, A Performance Audit and Sunset Review
of the Arizona Department of Transportation, Motor Vehicle Division—State Revenue Collection
Functions. This report is in response to a November 20, 2002, resolution of the Joint Legislative
Audit Committee. The performance audit was conducted as part of the sunset review process
prescribed in Arizona Revised Statutes §41-2951 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 Department of Transportation agrees with all of the
findings and plans to implement all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on September 28, 2004.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona Department of Transportation, Motor Vehicle Division (MVD)
pursuant to a November 20, 2002, resolution of the Joint Legislative Audit
Committee. This audit was conducted as part of the sunset review process
prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et seq and is the first in a
series of three reports on the Motor Vehicle Division. This report focused on several
MVD functions that produce or affect the revenue generated for the State. The
second report will focus on the security of MVD information systems and the status
and performance of ServiceArizona, the e-government program that MVD
implemented in November 1997. The third report will be an analysis of the 12
statutory sunset factors.
MVD, one of several divisions within the Arizona Department of Transportation
(ADOT), provides a number of services to the public, including issuing driver’s
licenses, vehicle titles, and permits. In addition, it enforces commercial transportation
laws and agreements through driver testing and licensing, as well as through its ports
of entry where commercial vehicles are checked for compliance with weight, size,
and safety laws, including hazardous materials requirements. In providing these
services, MVD collects significant revenues on the State’s behalf. These revenue
collections, which ADOT reports totaled more than $1.56 billion for fiscal year 2004,
include the vehicle license tax, gas and use fuel taxes, motor carrier taxes, and motor
vehicle registration fees. Only the Department of Revenue collects more revenues for
the State than MVD.
MVD can improve the cost-effectiveness of its vehicle
registration compliance program (see pages 11 through
18)
MVD should take various steps to improve the cost-effectiveness of its recently
established vehicle registration compliance program. In fiscal year 2002, the
Legislature provided MVD with funding to increase its vehicle registration compliance
Office of the Auditor General
SUMMARY
page i
efforts. This funding was allocated for 15 new peace officers using existing MVD
positions and for other activities to help enforce Arizona’s vehicle registration laws.
ADOT reports that Arizona’s vehicle license tax (VLT), collected through vehicle
registrations, provided $695.3 million in fiscal year 2004 to fund state highways and
roadways and other government expenses in counties, cities, and towns. However,
some state residents may avoid paying this tax by driving with out-of-state license
plates or expired Arizona license plates. Auditor analysis of the overall costs and
revenues of MVD’s three enforcement efforts found that using automated letters has
been the most cost-effective approach.
􀁺􇨠 Automated letter—MVD developed a software application that automatically
sends letters to new Arizona residents who have applied for a driver’s license,
but have not registered a vehicle. From October 2002 through June 2003, MVD
generated over an estimated $797,000 in vehicle license tax revenue from this
approach at a cost of slightly over $13,700.
􀁺􇩃 Citizen tips—MVD follows up on leads or tips regarding unregistered vehicles
received from citizens via MVD’s telephone hotline. In fiscal year 2003, MVD staff
who pursued these leads opened approximately 2,900 cases and generated
over an estimated $187,000 in vehicle license tax revenue at an approximate
cost of $63,000.
􀁺􇩐 Peace officers—MVD peace officers identify and pursue potential registration
violators through a variety of sources, including employer parking lot sweeps or
personal sightings of unregistered vehicles. Officers then issue letters, warnings,
or citations to achieve compliance. In fiscal year 2003, MVD’s officers opened
approximately 8,500 cases and generated over an estimated $588,000 in
vehicle license tax revenue at an approximate cost of $427,600.
MVD should build on the success of its automated letter approach by using its title
and registration system to automatically send letters to vehicle owners who do not
renew their vehicle registrations. California uses a similar method to help obtain
compliance with vehicle registration requirements. Specifically, the California
Department of Motor Vehicles sends up to three delinquent notices at 30, 60, and 90
days past registration to nonrenewing vehicle title holders.
Improvements are also needed to help ensure that MVD accurately determines and
reports the revenues generated from its enforcement efforts. When the Legislature
provided MVD with additional enforcement funding, it also directed it to measure the
return on investment for its enforcement program and remit 50 percent of the
increased revenue generated from enforcement activities to the General Fund. In
response to this requirement, MVD determined that the return on investment should
consist of both direct and indirect revenue. Direct revenue results when vehicle
State of Arizona
page ii
owners register their vehicles in response to an enforcement action. Indirect revenue
results from other members of the public registering their out-of-compliance vehicles
after learning of the enforcement program. Auditor analysis of data from MVD’s
database determined that direct VLT revenue is overstated by an estimated $233,000
for fiscal year 2003. This overstatement of revenue is caused by computer
programming errors. MVD needs to correct these errors so that direct VLT revenue is
more accurately stated. With regard to indirect revenue, the formula MVD adopted
for estimating this revenue and to serve as a basis for remitting a portion of this
revenue to the General Fund does not produce valid results. Developing a better
formula would likely be difficult and costly, and it is not clear that the program, which
is relatively small, can be expected to have much of an indirect effect. Thus, MVD
should eliminate the indirect revenue measure as part of its calculation of the return
on investment for its enforcement program and as a basis for remitting a portion of
this revenue to the General Fund.
MVD should improve fuel tax refunds processing (see
pages 19 through 25)
MVD needs to improve its processes for reviewing and issuing fuel tax refunds to
help ensure that claimants receive accurate amounts. Arizona taxes gasoline and
diesel fuel purchases so that drivers partially compensate the State for the use of its
highways. Arizona collects these taxes at the storage facility, not from the end-user.
According to statute, some suppliers and users are eligible for tax refunds because
they do not use the fuel on public roadways. For example, operators of farm
construction equipment used off the highway may be eligible for a tax refund. During
fiscal year 2003, MVD collected nearly $649 million in fuel taxes and provided more
than 6,600 refunds totaling over $23 million.
Work done for this audit, as well as internal reviews conducted by ADOT’s Office of
Audit and Analysis—Revenue Audit, shows that some refund amounts are incorrect
or are not supported by sufficient documentation. For example, as of May 2004,
ADOT auditors identified errors ranging from $8 to more than $5,800 in 7 of the 16
refunds audited during fiscal year 2004. ADOT auditors also used to conduct
prepayment reviews of refunds over $25,000 that often identified errors. This effort
identified errors in 7 of 18 refunds referred for review in fiscal year 2001, preventing
nearly $700,000 in inaccurately determined refunds from being paid. However, few
such reviews have occurred since fiscal year 2001 because of concerns about the
timeliness of the reviews and the lack of requirements specifying the claim types that
should be referred for review.
MVD should take several steps to improve its processing and review of fuel tax
refunds. These steps include updating and implementing additional refund
Office of the Auditor General
page iii
processing procedures to ensure these procedures adequately detail how claims
should be reviewed, processed, and issued; and that they specify the supporting
documentation needed to show that required activities were properly performed.
MVD should also improve its oversight of refund claim processing to help ensure the
appropriateness and accuracy of refunds, including incorporating two levels of
supervisory approval to authorize a refund payment. Finally, MVD should provide
better instructions to taxpayers on how to file claims and require taxpayers to provide
better documentation to support refund claims.
MVD should examine its fees (see pages 27 through 34)
MVD should continue with its efforts to examine the fees it assesses and the amounts
charged. Based on auditors’ review of statutes and administrative rules, MVD has
authority to assess over 350 different fees for the various services it provides.
According to MVD reports, fees assessed by MVD generated over $150 million for
the State in fiscal year 2003. However, until recently, MVD did not have a process in
place to periodically review these fees. Some fees appear outdated or too low to
cover the cost of providing the associated service. For example, vehicle title fees
have remained at $4 for over 30 years and may not reflect processing costs.
Although MVD does not have specific cost data, one MVD manager estimated that
a title transaction involves about 20 minutes of a customer service representative’s
time. If so, the current $4 fee may not cover the average costs of the customer service
representative’s salary and benefits, not to mention overhead costs or the additional
costs for preparing the title.
Further, a number of MVD’s fees are low when compared with those in other states.
Additionally, MVD lacks authority to charge a fee for one service—a Level I vehicle
title inspection, which verifies vehicle identity prior to registration. In fiscal year 2003,
MVD reports that it performed nearly 277,000 of these inspections which, in some
cases, required staff travel time in addition to the inspection time.
In January 2004, MVD formed an internal working group to begin reviewing its fees.
In addition to staffing the working group with key personnel from ADOT and MVD,
MVD plans to solicit input from the Joint Legislative Budget Committee and the
Governor’s Office of Strategic Planning and Budgeting. According to an MVD official,
as of April 2004, this working group has identified some of the fees it plans to review.
The working group has also begun to benchmark these fees and transactions to
similar transactions in the state of Washington.
In addition to these steps, the working group should develop or follow a structured
approach to systematically evaluate and review MVD’s fees, possibly using an
State of Arizona
page iv
approach that has been developed in Mississippi.1 This approach would allow the
group to systematically review its fees by considering whether the fee is needed, its
purpose, and whether it should be set at a level to recover its costs. Additionally, the
working group will need to develop and collect basic cost, revenue, and transaction
data and information related to fees and the services associated with the fees. This
information is not readily available at MVD. To reduce the resource requirements for
developing cost data, MVD should develop cost data only for the fees it prioritizes for
review.
MVD should better protect registration renewal fees (see
pages 35 through 38)
MVD can help prevent the loss or theft of state monies by making a number of
changes to its vehicle registration renew-by-mail procedures. Currently, MVD
receives over $15.7 million a month in mail-in vehicle registration payments. Through
March of fiscal year 2004, MVD also processed an average of nearly 3,900 renewals
daily, resulting in deposits of between $639,000 and $918,000 each day. To better
protect these monies, MVD should restrict employee access to the monies;
immediately endorse and deposit these monies upon receipt, either by processing
registration renewals the same day they are received or by storing monies in a secure
place while using a receipt for processing; and track receipts through the registration
renewal process. Finally, to ensure consistency, MVD should document these
policies and procedures, and periodically request a procedural review from ADOT’s
internal audit group.
Other pertinent information (see pages 39 through 41)
As part of the audit, auditors gathered information regarding ADOT’s efforts to
reconcile MVD’s cash-clearing account. This account is the initial point of deposit for
most of the revenue that MVD collects. These monies are then distributed to various
funds. MVD’s inability to accurately reconcile this account with the State’s accounting
system has been a long-standing problem. However, ADOT and MVD have made
significant progress in reconciling this account by adding resources, improving
reconciliation processes, and accounting for a $9.5 million unreconcilable difference
between the two systems that was identified by a 1997 ADOT internal audit report.
As a result of these efforts, from April through November 2003, the monthly
differences have been narrowed to less than $11,000.
Office of the Auditor General
page v
1 Mississippi Joint Legislative Committee on Performance Evaluation and Expenditure Review. State Agency Fees: FY 2001
Collections and Potential New Fee Revenues. Jackson, Miss.: Dec. 2002.
State of Arizona
page vi
Office of the Auditor General
TABLE OF CONTENTS
continued
1
11
11
12
15
16
18
19
19
20
22
25
27
27
28
31
34
Introduction & Background
Finding 1: MVD can improve the cost-effectiveness of
its vehicle registration compliance program
Vehicle license tax and enforcement
MVD can improve cost-effectiveness of enforcement efforts
Enforcement revenues less than reported
MVD should discontinue using indirect revenue measurement
Recommendations
Finding 2: MVD should improve fuel tax refunds
processing
Some fuel uses eligible for tax refunds
Some fuel tax refunds inaccurate
MVD should develop better refund process
Recommendations
Finding 3: MVD should examine its fees
Purpose of fees
Some MVD fees may be unnecessary or inappropriately
established
MVD’s working group should establish a fee-setting process
Recommendations
page vii
State of Arizona
TABLE OF CONTENTS
Finding 4: MVD should better protect registration
renewal fees
Vehicle registration renewals
MVD does not adequately safeguard registration renewal
payments
Recommendations
Other Pertinent Information
Agency Response
Tables:
1 Motor Vehicle Division Operations
Statement of Revenues, Expenditures, and Changes in
Fund Balance, in Thousands
Years Ended June 30, 2002 through 2004
(Unaudited)
2 Direct Vehicle License Tax Revenue Estimates and Related
Costs by Vehicle Registration Enforcement Method
Fiscal Year 2003
3 MVD-Prepared Schedule of
Direct and Indirect Revenues
(Rounded to nearest thousand)
July 2002 through June 2003
4 Fuel Tax Refunds
Fiscal Year 2003
(Unaudited)
5 Common MVD Fees
Fiscal Year 2003
35
35
36
38
39
7
13
17
19
29
continued
page viii
Office of the Auditor General
TABLE OF CONTENTS
concluded
31
41
4
5
33
Tables (Concl’d):
6 Comparison of Selected State Fees
As of May 2004
7 Cash Balance Unreconciled Differences
Between the MVD System and
the State’s General Fund Ledger
September 2002 through November 2003
Figures:
1 Vehicle License Tax Distribution, in Millions
Year Ended June 30, 2004
(Unaudited)
2 Sources and Distributions of
Highway User Revenue Fund Monies, in Millions
Year Ended June 30, 2004
(Unaudited)
3 Mississippi Joint Legislative Committee on
Performance Evaluation and Expenditure Review
Structured Fee-Setting Process
Developed for State Government
page ix
State of Arizona
page x
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona Department of Transportation, Motor Vehicle Division pursuant
to a November 20, 2002, resolution of the Joint Legislative Audit Committee. This
audit was conducted as part of the sunset review process prescribed in Arizona
Revised Statutes (A.R.S.) §41-2951 et seq and is the first in a series of three reports
on the Motor Vehicle Division. This report focused on several MVD functions that
produce or affect the revenue generated for the State. The second report will focus
on the security of MVD information systems and the status and performance of
ServiceArizona, the e-government program that MVD implemented in November
1997. The third report will be an analysis of the 12 statutory sunset factors.
MVD programs and staffing
The Arizona Department of Transportation (ADOT)
was formed in 1974 and consists of six operating
divisions, including the Motor Vehicle Division
(MVD). While most of ADOT focuses on highway
transportation planning, construction, and
maintenance, MVD’s mission is unique within the
Department. Specifically, MVD defines its mission
as “supporting Arizona through licensing, vehicle
credentialing, revenue collection, safety
programs, and by promoting compliance with
transportation laws.” As such, MVD provides a
variety of services to Arizona citizens. These
include issuing driver’s licenses, vehicle titles, and
vehicle registrations; enforcing commercial
transportation laws and agreements through
driver testing and licensing; and collecting
significant state tax revenues, including the vehicle
license and fuel taxes. As of July 8, 2004, MVD
reported a total of 1,894 positions funded with
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
MVD—Fiscal Year 2003 Activity
Customers served: 4.73 million
(In field offices)
Type of transaction:
Driver’s licenses issued 1.04 million
Vehicle registrations 3.99 million
Vehicles weighed at ports 4.64 million
Vehicle inspections 311,500
Method of transaction:
Field offices 5.74 million
Internet 1.76 million
Renew-by-Mail registrations 988,100
Source: Auditor General staff summary of unaudited Arizona Department of
Transportation, Motor Vehicle Division fiscal year 2004 Strategic Plan and
various MVD reports.
state-appropriated monies.1 As of this date, MVD reported that 1,576 positions were
filled, while 318 were vacant. MVD employees work in the following three programs:
􀁺􇩃 Customer Services (1,223 filled positions; 212 vacancies)—The Customer
Services program consists of the following:
􀂄􈑃 Customer Service (880 filled positions; 136 vacancies)—Within this
subprogram, MVD has 60 field offices established throughout the State that
provide a variety of services to the public. These services include issuing
driver’s licenses, vehicle registrations, permits, and vehicle titles, and
collecting driver’s license and vehicle registration fees.
􀂄􈑍 Motor Carrier and Tax Services (73 filled positions; 28 vacancies)—
Responsibilities of the Motor Carrier and Tax Services subprogram include
collecting gasoline and use fuel taxes, and issuing fuel tax refunds to
eligible claimants, helping to assure motor carrier safety by overseeing the
medical reviews of commercial and noncommercial drivers, registering
interstate motor carriers, and issuing commercial driver’s licenses.
􀂄􈑃 Competitive Government Partnerships (81 filled positions; 12 vacancies)—
According to MVD, this subprogram oversees 488 contractors that have
agreements to provide MVD services to the public and businesses, such as
vehicle titles and registrations, driver’s license exams, and vehicle
inspections. Additionally, this subprogram oversees transactions
conducted via the Internet through a dedicated Web site; licenses and
oversees 424 professional driving schools, traffic survival schools, and
driver education programs; and licenses the over 3,800 motor vehicle
dealers in the State. Finally, Competitive Government Partnerships provides
record sales to 87 commercial and 150 government
agencies/departments, and oversees the Renew-by-Mail Unit, which
processes vehicle registration renewals.
􀂄􈑄 Division Operational Support Services (189 filled positions; 36 vacancies)—
Responsibilities of this subprogram include MVD policies and rule writing,
public information call center operations, records management, and the
Division’s technical training.
􀁺􇨠 Motor Vehicle Enforcement Services (214 filled positions; 87 vacancies)—The
Motor Vehicle Enforcement program enforces transportation-related laws and
regulations at both mobile and fixed port-of-entry check points. Currently, MVD
maintains 22 ports of entry on highways at Arizona’s borders. Port operations
include enforcing commercial vehicle compliance with weight, size, and safety
laws, including hazardous materials requirements. In addition, this program
enforces vehicle registration compliance, conducts vehicle inspections to verify
vehicle identification numbers against ownership documentation and the
vehicle, and helps to identify stolen vehicles.
1 This total does not include an additional 47 positions funded with federal or nonappropriated monies.
State of Arizona
page 2
􀁺􇩍 Motor Vehicle Support Services (139 filled positions; 19 vacancies)—Support
Services consists of the following:
􀂄􈑄 Director’s Office (11 filled positions; 2 vacancies)—The Director’s Office
provides leadership and assistance in legislative, government, public
information, and community relations, information systems support, and
organizational development.
􀂄􈑅 Executive Hearing Office (23 filled positions; no vacancies)—The Executive
Hearing Office conducts administrative hearings on issues such as DUI
offenses, motor vehicle titles, dealer licenses, and motor carrier safety.
􀂄􈑏 Office of Special Investigations (36 filled positions; 4 vacancies)—This
Office investigates title and driver’s license fraud and employee
misconduct.
􀂄􈑅 Executive Services Group (69 filled positions; 13 vacancies)—This Group
provides various support services to the Division, including budgeting,
purchasing, personnel services, facility management, procurement, and
strategic planning.
MVD revenue collections and distributions
In performing its duties, MVD collects a variety of taxes and fees. These include
gasoline fuel taxes, vehicle license taxes, fees for the registration and operation of
motor vehicles, and driver’s license and other miscellaneous fees. In fact, only the
Department of Revenue collects more taxes and fees for the State than MVD. For
fiscal year 2004, ADOT reported that MVD collected over $1.56 billion in revenues. Of
this total, MVD collected $695.3 million in Vehicle License Tax (VLT) revenues. VLT is
an annual license tax imposed on registered vehicles and is based on the vehicle’s
assessed value. Counties, cities, and towns receive almost 55 percent of the
collected VLT monies for highway maintenance and general government expenses,
while approximately 45 percent ($312.3 million for fiscal year 2004) of VLT revenues
are deposited into the Highway User Revenue Fund (HURF). See Figure 1 on page
4 for the Vehicle License Tax Distributions for fiscal year 2004. In addition to the VLT
revenues, MVD deposits additional fees and taxes into HURF to help meet Arizona’s
street and highway needs. As illustrated in Figure 2 (see page 5), the additional fees
and taxes include:
􀁺􇨠 Gas and Use Fuel Taxes ($642.5 million)—Arizona taxes those who purchase
gasoline in the State at $0.18 per gallon. The purchase of other use fuels, which
includes all other gases and liquids used to propel motor vehicles, such as
diesel fuel, is taxed at $0.26 per gallon.
MVD is second only to
the Department of
Revenue in revenue
collection.
Office of the Auditor General
page 3
􀁺􇨠 Motor Vehicle Registration Fees ($146.7 million)—In addition to the vehicle
license tax, Arizona charges registration fees for both commercial and
noncommercial vehicles, as well as nonresident permit fees and registration
penalties.
􀁺􇩍 Motor Carrier Taxes ($34.6 million)—These taxes are imposed on commercial
carriers based on vehicle weight.
􀁺􇩏 Other User Fee Revenues ($43.5 million)—Other user fee revenues include fees
for titles, driver’s licenses, oversize/overweight permits, and inquiries and fuel
permits, as well as highway fines, fuel tax penalties, investment interest, and
other miscellaneous fees.
Based on statutory formulas and as illustrated in Figure 2 (see page 5), distribution
from HURF is made to the State Highway Fund; Arizona cities, towns, and counties;
State of Arizona
page 4
Other1
$1.2
Cities and Towns
$170.6
Counties2
$211.2
Highway User
Revenue Fund
$312.3
Figure 1: Vehicle License Tax Distribution, in Millions
Year Ended June 30, 2004
(Unaudited)
1 Consists of $0.4 million to the State Highway Fund and $0.8 million to the State General
Fund for school aid.
2 Includes $40.6 million to counties specifically for highway purposes.
Source: Auditor General staff analysis of the Department's Vehicle License Tax
Distribution for the year ended June 30, 2004, and A.R.S. §§28-5801 and 5808.
Vehicle License Taxes Collected = $695.3 Million
Office of the Auditor General
page 5
Gas and use
fuel taxes
$642.5
Vehicle
license taxes 1
$312.3
Motor vehicle
registration fees
$146.7
Motor carrier
taxes
$34.6
Other
revenues
$43.5
Sources
Highway User
Revenue Fund
$1,179.6
Distributions
State Highway
Fund
$570.4 2
Cities and
Towns
$344.5
Counties
$214.6
Department of
Public Safety
Transfer
$48.7
Economic
Strength
Project Fund
$1
Registration
Compliance
Program
$.4
Source: Auditor General staff analysis of the Department's Highway User Revenue Fund Revenue Trend by Category, Distributions to
Cities, Towns, and Counties; and other information provided by the Department of Transportation for the year ended June 30,
2004.
1 Portion of vehicle license taxes distributed to the Highway User Revenue Fund.
2 Includes $86.7 million distributed to Maricopa and Pima Counties for controlled access.
Figure 2: Sources and Distributions of
Highway User Revenue Fund Monies, in Millions
Year Ended June 30, 2004
(Unaudited)
State of Arizona
page 6
and other entities. According to Arizona’s Constitution, HURF monies can be used
only for costs associated with highways or streets. Acceptable expenditures include
administering laws, acquiring right of way, and making payments on highway and
street bonds. Costs associated with construction, maintenance, repair, and roadside
development can also be supported by HURF monies. Additional programs or
agencies that receive distributions from HURF include the Economic Strength Project
Fund, which provides monies for projects recommended by the Commerce and
Economic Development Commission and that are approved by the Transportation
Board; the Arizona Department of Public Safety, which uses HURF monies to help
fund highway patrol costs; and MVD’s Registration Compliance Program, which uses
HURF monies to enforce compliance with state vehicle license tax and registration
laws.
MVD’s operating budget
The majority of the Motor Vehicle Division’s operating budget consists of monies
appropriated from the State Highway Fund. Table 1 (see page 7) illustrates MVD’s
actual revenues and expenditures for fiscal years 2002 through 2004. As shown,
MVD’s operating revenues for fiscal year 2003 were $83.3 million and increased to
$87.3 million for fiscal year 2004. This represents a 4.8 percent increase in operating
revenues from fiscal year 2003. MVD had operating expenditures of $81 million in
fiscal year 2003, while its expenditures increased to $85.1 million in fiscal year 2004,
for a 5.1 percent increase in operating expenditures. According to an MVD official,
most of this increase in expenditures results from increased employee health and
retirement benefits, as well as replenishing its inventory of license plates due to
increased demand for these plates during fiscal year 2004. MVD’s largest expenses
are personal services and related benefits, which accounted for 73 percent of the
total operating expenditures for fiscal year 2004.
Audit scope and methodology
This audit focused on MVD functions that produce or affect the revenue generated
for the State, including MVD’s enforcement of vehicle registration laws, processes for
reviewing and issuing fuel tax refunds to eligible claimants, appropriateness of
amounts currently charged for fees, processing of mail-in vehicle registration
renewals, and efforts to reconcile its cash-clearing account. This report includes
findings and recommendations in the following four areas:
􀁺􇨠 MVD needs to take various steps to improve the cost-effectiveness of its recently
implemented vehicle registration compliance program and to correct errors in
the calculations of its revenues from these enforcement efforts.
􀁺􇩍 MVD needs to pursue various improvements to its fuel tax refunds process to
better ensure that submitted refund claims are valid and accurate.
􀁺􇩗 While MVD generates significant revenues by assessing hundreds of fees,
MVD’s internal working group should develop or follow a structured approach to
review the appropriateness and necessity of the hundreds of fees it assesses.
􀁺􇩍 MVD needs to employ stronger cash-handling procedures to adequately
safeguard vehicle registration renewal payments.
Office of the Auditor General
page 7
Table 1: Motor Vehicle Division Operations
Statement of Revenues, Expenditures, and Changes in Fund Balance, in Thousands 1
Years Ended June 30, 2002 through 2004
(Unaudited)
2002 2003 2004
Revenues:
State Highway Fund 2 $72,879.8 $77,014.6 $81,912.0
Motor vehicle licenses, title, and registration fees 3,478.0 2,840.6 2,416.3
Charges for services 3 2,391.4 2,796.2 2,522.3
Highway User Revenue Fund 4 648.2 383.3
Other 55.7
Total revenues 78,749.2 83,299.6 87,289.6
Expenditures and operating transfers out:
Personal services and related benefits 56,209.7 63,129.9 62,194.2
Professional and outside services 867.8 912.7 2,235.3 5
Travel 394.0 321.0 252.3
Other operating 15,566.3 16,128.6 18,017.4
Equipment 2,615.0 484.5 2,414.6
Total expenditures 75,652.8 80,976.7 85,113.8
Operating transfers out 1,122.3 124.8 107.7
Total expenditures and operating transfers out 76,775.1 81,101.5 85,221.5
Excess of revenues over expenditures and transfers out $ 1,974.1 $ 2,198.1 $ 2,068.1
1 This table includes only revenues and expenditures relating to the Motor Vehicle Division operating budget.
2 Consists of the Division’s portion of State Highway Fund monies used to pay for its operations. The State Highway Fund receives
monies from the Highway User Revenue Fund, and fuel and motor carrier taxes.
3 Consists of fees collected in accordance with A.R.S. §28-4151 for the reinstatement of motor vehicle registration and license plates.
This amount consists of only the portion used for division operations.
4 Consists of the Division’s portion of Highway User Revenue Fund (HURF) monies used to pay for its operations. The HURF receives
gasoline and use fuel taxes, motor carrier taxes, motor vehicle registration fees, and other miscellaneous fees. See Figure 2, page 5
for sources and distributions of HURF monies.
5 Amount includes purchase of license plates from the Arizona Correctional Industries. The Division indicates that the large increase
for fiscal year 2004 resulted from increased demand for license plates and the Division replenishing its inventory at fiscal year end.
Source: Auditor General Staff analysis of financial information provided by the Arizona Department of Transportation and Arizona
Financial Information System (AFIS) Revenues and Expenditures by Fund, Program, Organization, and Object report for the
years ended June 30, 2002, 2003, and 2004.
In addition, this report includes other pertinent information regarding the lack of
current and timely reconciliations of MVD’s cash-clearing account.
Auditors used a number of methods to obtain information about the Division’s
programs and study the issues addressed in this report. These methods included
interviewing ADOT and MVD management and staff; and reviewing statutes,
administrative rules, MVD procedures, policy memos, and ADOT/MVD’s strategic
plans for fiscal years 2003 and 2004.
Auditors also used the following specific methods:
􀁺􇩔 To assess the effectiveness of MVD’s vehicle registration enforcement efforts
and validity of reported revenues associated with these efforts, auditors
analyzed data on fiscal year 2003 vehicle registration compliance cases from
MVD’s Registration Compliance System. In addition, auditors interviewed
representatives from five states and the United Kingdom to discuss
enforcement methods, automated enforcement techniques, and the
measurement of indirect revenue from direct enforcement efforts.1 Auditors also
reviewed studies of vehicle tax evasion and enforcement.2,3
􀁺􇩔 To evaluate the accuracy of MVD’s fuel tax refund processing, auditors observed
the processing of fuel tax refunds and examined 44 internal audits and reviews
performed by ADOT’s Office of Audit and Analysis—Revenue Audit in fiscal
years 2001 through 2004. Auditors also evaluated refund forms and instructions
from eight states and analyzed fuel tax refund audits from Washington and
Tennessee.4 Further, auditors reviewed a Federal Highway Administration report
related to fuel tax evasion.5
1 Auditors interviewed representatives from either the state agency or the state audit organization in five states: California,
Colorado, Kentucky, Utah, and Wyoming. Utah and Kentucky were selected because they had conducted a recent audit
of vehicle registration evasion in their states, while California, Colorado, and Wyoming were selected because they are
Western states with similar vehicle license taxes to those of Arizona. Additionally, auditors interviewed representatives
from the United Kingdom Comptroller and Auditor General because they conducted a comprehensive study of vehicle
registration compliance for years 2002-2003.
2 The Council of State Governments and the Council of Governors’ Policy Advisors. Road Fund Tax Evasion: A State
Perspective. Lexington, KY:1996.
3 Office of the Utah Legislative Auditor General. A Performance Audit of Unregistered Passenger Vehicles in Utah. Utah.:
Oct. 2001.
4 Auditors reviewed refund claim forms from California, Florida, Idaho, Missouri, North Carolina, Tennessee, Texas, and
Washington.
5 U.S. Department of Transportation, Federal Highway Administration. Fuel Tax Evasion: The Joint Federal/State Motor Fuel
Tax Compliance Project. June 1992.
State of Arizona
page 8
􀁺􇩔 To evaluate MVD’s current fee structure and to determine whether fees cover the
costs of the associated services, auditors identified over 350 fees assessed and
collected by MVD and the amounts of these fees through a review of statutes
and administrative rules and compared a sample of MVD’s fees to similar fees
in six other states.1 Auditors also reviewed several studies and literature
describing best practices in setting government fees and sources of potential
new fee revenues.2,3,4
􀁺􇨠 To evaluate MVD’s processes and cash-handling procedures for mail-in vehicle
registration renewals, auditors observed the cash-handling practices of MVD’s
Renew-by-Mail Unit. Auditors also reviewed the contract between MVD and
Arizona Correctional Industries for the processing of license plate tabs, MVD
volume and revenue collection reports for fiscal year 2003 and the first 9 months
of fiscal year 2004, and internal control requirements published in the State of
Arizona Accounting Manual.
􀁺􇩔 To develop information on the lack of current and timely reconciliations of the
MVD cash-clearing account, auditors reviewed the reconciliations performed by
MVD from July 2003 through November 2003 and a journal entry prepared to
account for an unreconcilable difference. Auditors also reviewed the June 1997
ADOT internal audit report; a management letter from Deloitte and Touche, LLP,
ADOT’s external auditor, dated November 15, 2002; and a July 2001 United
States General Accounting Office report.5
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director and staff of the
Arizona Department of Transportation and the Motor Vehicle Division director and
staff for their cooperation and assistance throughout this audit.
1 Auditors compared Arizona’s fees to similar transaction fees in California, Colorado, Nevada, New Mexico, Texas, and
Utah. These states were selected because of their geographic and demographic similarity to Arizona.
2 Zodrow, George R. State Sales and Income Taxes: an Economic Analysis. College Station:Texas A&M University Press,
1999.
3 Fisher, Ronald C. State and Local Public Finance. Chicago:Irwin,1996.
4 Mississippi Joint Legislative Committee on Performance Evaluation and Expenditure Review. State Agency Fees: FY 2001
Collections and Potential New Fee Revenues. Jackson, Miss.: Dec. 2002.
5 United States General Accounting Office, Financial Management: Improvements in Air Force Fund Balance with Treasury
Reconciliation Process, GAO-01-847. Washington, D.C.: July 2001.
Office of the Auditor General
page 9
State of Arizona
page 10
MVD can improve the cost-effectiveness of its
vehicle registration compliance program
MVD should take various steps to improve the cost-effectiveness of its recently
established vehicle registration compliance program. First, MVD should develop an
automated delinquency letter to contact Arizona residents with expired vehicle
registrations. MVD should also improve its systems for enforcement case-tracking,
to correct revenue-reporting errors and better direct enforcement officers’ efforts.
Finally, MVD should discontinue using its indirect revenue measure as part of the
calculation of the return on investment for its enforcement program and as a basis
for remitting a portion of this revenue to the General Fund because this measure
does not produce valid results, and a more appropriate measurement is too costly
to develop.
Vehicle license tax and enforcement
The vehicle license tax (VLT), collected through vehicle registrations, represents a
significant source of revenues for state and local governments. For fiscal year 2004,
MVD collected $695.3 million in VLT revenue. The Highway User Revenue Fund
receives approximately 45 percent of these monies for highway construction and
maintenance and distributes the remaining 55 percent to local governments for both
highway and general government expenses. Arizona’s VLT is based on a
combination of the manufacturer’s price of the vehicle when new, the age of the
vehicle, and the tax rate adopted by the Legislature. Vehicle license taxes averaged
$158 per vehicle in fiscal year 2003, but can be as high as $1,000 or more for a new,
high-priced vehicle.
Some Arizona residents may avoid paying Arizona’s VLT by driving with license
plates from other states or with expired Arizona license plates. In 1996, the Council
of State Governments, a national nonprofit organization serving all three branches of
state governments, summarized evasion rate studies from both the general literature
Over $695 million in VLT
revenue was received
during fiscal year 2004.
Office of the Auditor General
FINDING 1
page 11
and specific states.1 At that time, based on a survey of state revenue administrators,
the Council reported that revenue gains of 4.7 percent could be achieved if vehicle
tax evasion were eliminated. While the Council cited a study that estimated Arizona’s
evasion rate at between 4.8 and 7 percent, the study was conducted in 1984, and
auditors did not identify a more recent study of Arizona’s evasion rate.2 In a 2001
study by Utah’s legislative auditor general, Utah’s evasion rate was estimated at 3.8
percent.3 However, both the Council of State Governments and Utah’s Auditor
General suggested that complete elimination of vehicle registration evasion is
unlikely.
Beginning in July 2002, the Legislature appropriated nearly $1.3 million to MVD to
increase its vehicle registration compliance efforts. These appropriated monies were
allocated for 15 new peace officers using existing MVD positions, associated training
and vehicle operating expenditures, and one-time expenditures, such as computer
programming and equipment. With this funding, MVD hired a new group of
enforcement officers, resumed its automated letter system for new residents, and
publicized registration laws through limited television, radio, and billboard
advertisements featuring a well-known actor. While the advertisements did not
publicize the already existing MVD telephone hotline, which takes citizen tips on
potential violators, news coverage of MVD’s enforcement activities publicized the
citizen hotline. Prior to these efforts, according to MVD officials, MVD’s enforcement
of vehicle registration laws varied with budget resources and agency priorities, but
typically consisted of a few officers who pursued registration cases along with other
enforcement duties.
In providing this funding, the Legislature also directed that MVD remit 50 percent of
increased vehicle license tax collections resulting from the enforcement program to
the State General Fund (Laws 2002, Ch. 328, §24) .
MVD can improve cost-effectiveness of enforcement
efforts
MVD should increase its reliance on automated methods to identify and pursue
vehicle registration law violators. Information from MVD case data shows that
automated and administrative methods may be more cost-effective than officers’
casework. As a result, MVD should develop a second automated method to enforce
compliance with Arizona’s vehicle registration laws.
1 The Council of State Governments and the Council of Governors’ Policy Advisory. Road Fund Tax Evasion: A State
Perspective. Lexington, KY:1996.
2 Market Opinion Research, Estimates of Revenue Loss Arising from Vehicle Registrations. Detroit, Mich:Dec.1984.
3 Office of the Utah Legislative Auditor General. A Performance Audit of Unregistered Passenger Vehicles in Utah. Utah. Oct.
2001.
State of Arizona
page 12
MVD automated method most cost-effective—MVD primarily relies on
three enforcement methods to enforce vehicle registration laws. These methods are
letters to new Arizona residents, pursuit of leads from citizens, and peace officer
efforts. Auditor analysis of the overall costs and revenues of these enforcement
methods found that cases pursued through the new-resident letter or through citizen
tips are more cost-effective than officer cases. Table 2 illustrates the revenues and
costs for these enforcement methods. Specifically:
􀁺􇨠 Automated letters to new residents—MVD developed a software application that
generates letters to be sent to new residents who applied for a driver’s license
but did not register a vehicle. This system automatically sends a letter to the
name and address on the driver’s license record and informs the person of
Arizona’s vehicle registration laws. While not all people moving to the State need
to register a vehicle, MVD reports that from October 2002 through June 2003, of
the average of 3,900 persons who received these letters each month, nearly
one-sixth registered a vehicle within 60 days of receiving the letter. For the 9
months in fiscal year 2003 that the letters were operational, MVD generated over
an estimated $797,000 in VLT revenue from this enforcement approach,
whereas the postage and computer processing costs to send these letters
totaled slightly over $13,700, since letter initiation and handling is fully
automated. If a vehicle is not registered in response to the letter, these cases
may become leads for peace officers.
Office of the Auditor General
page 13
Table 2: Direct Vehicle License Tax Revenue Estimates and Related
Costs by Vehicle Registration Enforcement Method
Fiscal Year 2003
Enforcement Method1 OAG Estimated Revenue2 Approximate Cost3
Automated letter to new residents $797,112 $ 13,700
Administratively pursued lead from a citizen’s report 187,679 63,000
Peace officer cases 588,764 427,600
1 Because the enforcement methods involving automated letters to new residents and peace officers were not fully operational during
July through September 2002, annual revenues and costs for these enforcement methods are likely to be higher in fiscal year 2004.
2 The estimated revenues presented in this table reflect auditors’ analysis of enforcement cases and application of estimation techniques
to account for errors found in a random sample of 239 compliance cases.
3 Additional fiscal year 2003 costs for the registration compliance program included expenditures for advertising, computer programming,
and office supplies.
Source: Auditor General staff analysis of fiscal year 2003 enforcement cases included in MVD’s Registration Compliance System and salary
and expenditure information provided by the MVD Budget Office.
New resident letters
most cost-effective
enforcement method.
􀁺􇩌 Leads from citizen calls (hotline) and letters—MVD follows up on citizen tips
regarding unregistered vehicles via the efforts of two administrative assistants.
When MVD receives a tip, the assistants will determine whether the vehicle is
unregistered, and identify a mailing address for the individual if not provided by
the caller. If it appears the person may be in violation of Arizona’s vehicle
registration laws, and if an address is identified, the assistants will initiate an
automated letter informing the recipient of applicable registration laws. Due to
news coverage of MVD’s enforcement activities, which also publicized the
citizen hotline, calls from the public increased. According to MVD reports, citizen
tips increased from approximately 2,000 in fiscal year 2002 to over 17,000 in
fiscal year 2003. The MVD staff who pursue citizen tips opened approximately
2,900 cases in fiscal year 2003 and generated over an estimated $187,000 in
VLT revenue. The costs for this effort totaled an estimated $63,000 for fiscal year
2003, which included the two staff’s salary and employee-related expenditures.
􀁺􇩐 Peace Officers—Although authorized 15 peace officers, as of April 2004, MVD
reported that it employed 11 officers to enforce vehicle registration laws and had
4 vacant positions. These officers pursue leads from a variety of sources,
including sweeps of large employer parking lots or personal sightings of
unregistered vehicles. Officers’ actions may include warnings placed on
vehicles, visits to a potential violator’s residence or workplace, citations, or
license plate removal. MVD’s officers opened approximately 8,500 cases in
fiscal year 2003 and generated over an estimated $588,000 in VLT revenue. The
fiscal year 2003 cost for officer salaries, employee-related expenditures, and
vehicle operating costs was approximately $427,600.
MVD should develop additional automated letter—To increase cost-effectiveness,
MVD should develop an additional software application to contact
persons with expired Arizona vehicle registrations. Similar to the letters sent to new
residents, MVD should use data from its title and registration system to send letters
to vehicle owners who have expired Arizona vehicle registrations. Currently, when a
vehicle owner receives the registration renewal, there is no MVD followup if
registration does not occur. For vehicle registrations that expired in September 2003,
at 60 days after expiration, more than 59,000 out of 258,000 vehicle owners eligible
to renew that month had not renewed their registrations. At 90 days after the
September expiration, more than 50,000 of the vehicles still had not been registered.
Although some registrations would not be renewed because the vehicle owner sold
the vehicle or moved out of Arizona, the number of nonrenewals is substantial.
Based on this incidence of nonrenewal, it would cost an estimated $18,900 per
month ($226,500 annually) in postage and computer processing fees if MVD sent a
single letter to the vehicle owner at 60 days’ delinquency or an estimated $16,100 per
month ($192,900 annually) at 90 days’ delinquency. As is the case with MVD
automated letters to new residents, revenues from letters to residents with expired
registrations have the potential to greatly exceed monthly expenditures. For example,
MVD does not follow up
when Arizona vehicle
registrations expire.
State of Arizona
page 14
Citizens can provide tips
on unregistered
vehicles.
based on the 2003 average VLT of $158 per vehicle, the estimated monthly costs of
sending a single letter at 60 days past expiration can be recovered by 120
registration renewals.
Other jurisdictions contacted use a similar method to obtain compliance with vehicle
registration requirements. For example, the California Department of Motor Vehicles
(DMV) uses a system of automated notices to pursue nonrenewing vehicle title
holders instead of relying on department peace officers. A spokesman for the
California DMV indicated that the use of delinquent notices and collections efforts is
the primary means of compliance enforcement other than citations issued by law
enforcement officers. California sends up to three delinquent notices, at 30, 60, and
90 days past the expiration of the vehicle registration. According to the spokesman,
the California DMV discontinued using DMV-employed peace officers to pursue
unregistered vehicle owners many years ago.
According to MVD management, it has identified monies from its fiscal year 2005
lump sum appropriation that it plans to use to fund the development and
implementation of a second automated letter. MVD estimates it will cost
approximately $52,000 to develop this additional enforcement method.
Enforcement revenues less than reported
MVD needs to improve its reporting of vehicle registration enforcement case
information to ensure accurate remittance of revenues to the General Fund and
accurate information on case success. Fiscal year 2003 VLT revenues resulting from
MVD’s three direct enforcement efforts are overstated by an estimated $233,000.
MVD should correct the computer programming errors that have resulted in
inaccurate revenue reporting. MVD should also make system improvements to allow
cost analysis of its enforcement efforts.
Direct revenues overstated—For fiscal year 2003, MVD reported $1.95 million in
vehicle registration enforcement revenues, consisting of VLT and fee revenue, but
these revenues are overstated. Accurate reporting of revenues is important because,
by statute, MVD is required to remit 50 percent of increased vehicle license tax
collections because of its vehicle registration enforcement program to the General
Fund. However, auditor analysis of data from MVD’s Registration Compliance
System, which tracks vehicle registration enforcement cases and associated
revenues, determined that VLT enforcement revenues are overstated by an estimated
$233,000.
This estimated reporting error is caused by faulty logic in the computer programs
used to attribute monies to specific enforcement cases, and MVD should correct
these logic problems. Specifically, MVD’s computer program automatically counts
California relies on
delinquency notices.
Office of the Auditor General
page 15
the most recent VLT revenue on record for the vehicle, even if the revenue was
received months before the case opened or if the vehicle had never been in violation.
For example, if an officer opens a case on a vehicle that is later determined to be
actually registered, the program still attributes this revenue to the case. In addition,
the computer program counted approximately $95,000 of revenues more than once.
Most of this error occurred in the automated database letters to new residents
because when letters are sent to a husband and wife, for example, two cases are
opened. If one vehicle is later registered, the revenues are attributed to both cases,
counting the revenue twice.
MVD should determine case costs—In addition to correcting the
programming problems, MVD should evaluate the cost-effectiveness of its cases.
While MVD maintains a database of vehicle registration enforcement cases,
limitations in this database prevent analysis of the costs associated with pursuing the
different types of cases. For example, MVD has not conducted an analysis to
determine the cost-effectiveness of pursuing out-of-state versus expired Arizona
vehicle registration cases; or the cost-effectiveness of its different enforcement
methods, such as parking lot sweeps, issuing warnings, or issuing citations. The
current system does not track the number and extent of activities associated with
each method, including peace officer time and resources spent on a case. This lack
of information prevents cost comparison of case types or enforcement methods. In
order for MVD to actively direct its enforcement staff activities to the most cost-effective
enforcement methods, MVD should either make the necessary
improvements to the enforcement database to allow for the tracking and analysis of
case costs and activities or periodically conduct valid studies to determine case cost
and effectiveness.
MVD should discontinue using indirect revenue
measurement
The indirect revenue formula adopted by MVD to measure and remit monies
generated from its vehicle registration enforcement program does not produce valid
results and should not be used as a basis for remitting monies to the General Fund.
Specifically, this formula does not produce valid results because it is not closely tied
to enforcement efforts and actually measures a variety of factors, including more
pervasive economic conditions. Indirect revenues result from potential evaders who
register vehicles after seeing or hearing about an enforcement action against others.
When the Legislature appropriated monies for MVD’s expanded enforcement efforts,
it directed MVD to measure the return on investment for its enforcement program and
remit half of the increased revenues generated from enforcement activities to the
General Fund. According to MVD, it was generally understood that in addition to
direct revenues resulting from enforcement efforts, indirect revenues would result
because of the public knowing about the enforcement program. Therefore, MVD and
Indirect revenue formula
does not produce valid
results.
Costs of enforcement
methods not tracked or
analyzed.
State of Arizona
page 16
ADOT developed a formula to calculate indirect revenue. Based on the formula, MVD
remitted over $5 million from indirect revenues to the General Fund for the first two
quarters of fiscal year 2003. However, as shown in Table 3, the formula has resulted
in indirect revenue amounts that represented increased noncompliance from
enforcement activities. For example, even though MVD generated direct revenues of
$214,000 in May 2003, the formula estimated that indirect revenues were a negative
$7.9 million.
These results are caused by the fact that instead of measuring the impact of
enforcement efforts, the formula primarily measures how much VLT revenues change
from year to year. The formula compares each month’s total VLT revenues to the
same month in the prior year, makes several adjustments, and then labels the
difference “indirect revenue.” Many factors can influence annual VLT collections,
such as the growth in the number of vehicles, the public’s ability and willingness to
pay their VLT, the number of biennial registrations compared to annual registrations,
and the general state of the economy that impacts the dollar value of vehicles. These
factors can overwhelm or hide any indirect revenue effect that the formula might also
capture.
MVD should discontinue using the indirect revenue measure as part of its calculation
of the return on investment of its vehicle registration enforcement program and as a
basis for remitting a portion of this revenue to the General Fund. Developing a better
Office of the Auditor General
page 17
Table 3: MVD-Prepared Schedule of
Direct and Indirect Revenues
(Rounded to nearest thousand)
July 2002 through June 2003
Month
Direct Revenues
Received
Indirect Revenues
Estimated
July 2002 $ 15,000 $ 1,696,000
August 13,000 970,000
September 30,000 380,000
October 265,000 3,399,000
November 166,000 4,124,000
December 210,000 320,000
January 2003 228,000 (4,361,000)
February 170,000 (7,829,000)
March 187,000 (8,212,000)
April 216,000 (2,769,000)
May 214,000 (7,913,000)
June 240,000 (873,000)
Source: Motor Vehicle Division Strategic Plan FY2003, Director’s
Update, June 2003.
Direct Revenues—Represent actual
registration enforcement revenues
received from vehicle owners
registering their vehicles in
response to MVD automated new
resident letters or letters, warnings,
or other actions by peace officers or
administrative staff.
Indirect Revenues—Represent
estimated registration revenues that
may be received from other vehicle
owners registering their vehicles
because they saw or heard about
the direct enforcement efforts.
These amounts are estimated by
taking the difference between a
month’s registration revenues this
year and last year and adjusting it
for several factors.
measure will be difficult and may be very costly because it will be resource-intensive
to design and implement. After searching for a similar measure in Arizona’s
government, other states and governments, and through a literature review, auditors
were unable to find a measure of indirect revenue. Further, it is not clear whether
Arizona’s program, which is relatively small, can be expected to have a very large
indirect effect. Much of what the program does—such as following up on citizen tips
or checking the parking lots of major employers—is not very visible to the general
public. Without a broader public awareness of its program, it would be difficult to
produce a significant change in the number of people who are out of compliance.
Recommendations
1. MVD should develop an additional software application to send delinquency
letters to Arizona residents who do not renew their vehicle registrations.
2. MVD should ensure that revenues from its vehicle registration enforcement
efforts are correctly reported by addressing the programming errors that allow
revenues to be erroneously attributed to cases.
3. MVD management should either modify its Registration Compliance System to
track the enforcement activity for each case or periodically conduct valid studies
of registration enforcement cases so that management can determine the cost-effectiveness
of the various case types and enforcement methods and direct
officer activities to those cases and methods.
4. MVD should discontinue using the indirect revenue measure as part of its
calculation of the return on investment of its vehicle registration enforcement
program and as a basis for remitting a portion of this revenue to the General
Fund.
State of Arizona
page 18
Office of the Auditor General
page 19
MVD should improve fuel tax refunds processing
MVD needs to improve its fuel tax refunds process to help ensure that eligible
claimants receive accurate refunds. Because Arizona collects its fuel taxes when fuel
is distributed from the storage facility, some suppliers and users may be eligible for
refunds of this tax based on certain uses of the fuel that are tax-exempt. However, the
MVD unit responsible for processing refund claims lacks adequate procedures and
oversight to process these refunds, sometimes resulting in inaccurate fuel tax
refunds. As a result, MVD should take several steps to improve the fuel tax refunds
process.
Some fuel uses eligible for tax refunds
Arizona taxes purchasers of gasoline and diesel fuel to
partially compensate the State for the use of its
highways. While all states tax gasoline and diesel fuel
purchasing, Arizona is one of several states that require
its $0.26 per gallon diesel (use fuel) tax and $0.18 per
gallon gasoline (motor fuel) tax to be paid as fuel exits
the distribution terminal or storage facility. With this
approach, Arizona collects the tax early and from fewer
taxpayers, which provides for greater scrutiny of the
taxes collected. However, MVD must subsequently
provide refunds to suppliers and users who have paid
the tax but used the fuel in ways that are tax-exempt.
During fiscal year 2003, MVD collected nearly $649
million in gross fuel tax receipts (diesel and gasoline)
and provided over 6,600 refunds totaling over $23
million to taxpayers for ten different types of fuel tax
refunds. Table 4 illustrates the categories that statute
FINDING 2
Table 4: Fuel Tax Refunds
Fiscal Year 2003
(Unaudited)
Off-highway use $10,261,152
Tax differential 5,299,898
Export fuel 2,675,039
Tax report/other 1,712,000
Native-American fuel 1,084,070
IFTA (International Fuel Tax Agreement) 888,014
Tax rebate for Arizona fuel purchases used
elsewhere
772,367
Government fuel 442,200
Idle time fuel 191,755
Aviation 12,698
Total fuel tax refunds $23,339,193
Source: Auditor General staff analysis of detail reports prepared for the Motor
Vehicle Division’s Strategic Plan, FY 2003, director’s update, June
2003.
exempts from paying the fuel taxes, as well as the fiscal year 2003 fuel tax refund
amounts for each category. These uses include:
􀁺􇩏 Off-Highway Use—Fuel used by vehicles or other equipment off the highway.
Potential uses that qualify include agriculture, construction operations, or
vehicles not designed or used primarily for transportation of people or property.
􀁺􇨠 Tax Differential—Vendors such as gas stations, who pay the diesel fuel tax rate
of $0.26 per gallon, but sell it to light-class motor vehicles, such as passenger
cars, with an $0.18 per gallon tax, can claim a refund for the $.08 per gallon
difference.
􀁺􇩅 Export Fuel—Fuel purchased by licensed suppliers who can show proof that
they exported the fuel across state lines.
􀁺􇩔 Tax Report/Other—Amounts refunded for overpayments, credit balances for
motor and use fuels, and exempt payers of underground storage tank taxes.
􀁺􇩎 Native American Fuel—Fuel sold within a reservation to an enrolled member of
the Native American tribe living on the reservation and fuel used on state
highways for governmental purposes if the motor vehicle is leased to or owned
by and operated for the sole benefit of a Native American tribe.
Some fuel tax refunds inaccurate
MVD has inaccurately determined some of the fuel tax (diesel and gasoline) refunds
it has made. For example, Arizona Department of Transportation (ADOT) auditors
have identified inaccurate refund amounts both in audits of payments made to
claimants and in prepayment reviews of other claims. Additionally, MVD has issued
fuel tax refunds without adequate supporting documentation to support the refund
claim. Finally, other weaknesses in the refunds process increase the potential for
fraud.
Refunds issued inaccurately—Based on auditor reviews of refunds issued by
MVD in fiscal year 2003, as well as 44 refund audits or reviews conducted by ADOT’s
Office of Audit and Analysis—Revenue Audit (Revenue Audit) in fiscal years 2001
through 2004, several refunds were inaccurately determined. These errors include
cases where MVD had already issued the refund, as well as high dollar amount
refunds where a final review by ADOT Revenue Audit caught the error prior to issuing
the refund. However, this final review has gone largely unused since 2001, greatly
reducing its usefulness as a safeguard against incorrect payments. Specifically:
􀁺􇩁 ADOT auditors identified inaccurate refunds—While ADOT Revenue Audit has
infrequently performed audits of refunds, during fiscal year 2004, Revenue Audit
State of Arizona
page 20
Office of the Auditor General
page 21
planned to randomly select 45 refunds to audit. As of May 2004, Revenue Audit
had completed 16 of these 45 refund audits and identified errors in 7 of them.
These errors, which included both over- and underpayments, ranged from $8 to
move than $5,800.
􀁺􇩆 Final review process also identified errors, but now is little used—Prior to
September 2001, Revenue Audit reviewed high dollar claims that were referred
to it prior to payment. These reviews identified inaccuracies that could have
resulted in hundreds of thousands of dollars in erroneous payments.
Specifically, Revenue Audit established guidelines for referring claims over
$25,000 and other unusual claims to Revenue Audit for review. Revenue Audit
reviewed 18 referred refund claims during fiscal year 2001 and identified errors
in 7 of them. This effort prevented nearly $700,000 in inaccurately determined
refunds from being paid. For example, one company filed a refund claim after
the filing time limit expired and also claimed a false exemption. This same
company filed another refund claim for taxes paid to the Navajo Nation. For July
and August 2001, only four claims had been referred to and reviewed by
Revenue Audit prior to payment. Review of these four claims totaling over
$310,000 identified claim errors of over $122,000, including two companies that
claimed refunds for payments previously received. The refund amounts for
these four claims were subsequently reduced. Since that time, MVD had not
referred additional refund claims for review through August 2003. According to
an MVD official, MVD has not continued to submit refund claims to ADOT
Revenue Audit for review because of concerns regarding the timeliness of
reviews, the lack of requirements specifying the types of claims that should be
referred for review, and a change in management for the MVD unit that
processes refunds.
Refunds may be approved without adequate documentation—
Documentation claimants submitted may be inadequate to support the refund
claim’s validity and ensure correct processing. Based on auditor review of nine
refund claims paid in fiscal years 2003 and 2004, auditors identified examples of
claims paid without required supporting documentation, such as current equipment
lists to substantiate off-highway use of fuel. For example, MVD issued refund
payments totaling over $18,600 to two companies without having required
equipment lists on file. Additionally, based on auditor review of 21 Revenue Audit
reviews of refunds, four refund claims filed in fiscal year 2001 that requested
exemptions for taxes paid in Arizona on fuel exported to another state did not include
documentation from the other states to show receipt of the fuel. Finally, in some
cases, claimants are not required to provide documentation supporting the stated
use that qualified for a refund. For example, for gas stations requesting the $0.08
cent differential allowed when diesel fuel is sold to light-class motor vehicles, the
vendor is not required to support the claim by submitting sales receipts or other
records, although the vendor is required to maintain these records. These fuel tax
refunds represented nearly 23 percent of the fuel tax monies refunded in fiscal year
2003.
Some refunds lack
adequate supporting
documentation.
State of Arizona
page 22
Potential for fraud increased—Inadequately supported and reviewed refund
claims increase the potential for fraud or tax evasion. Studies by the Federal
Highway Administration and The Council of State Governments indicate that
substantial revenue is lost nation-wide because of fuel tax evasion.1, 2 Additionally,
according to the Federal Highway Administration study, examining taxpayer records
is fundamental to reducing fuel tax evasion. To counteract fuel tax evasion and fraud,
MVD organized a fuel tax evasion unit in fiscal year 2002. In addition to other
responsibilities, this unit combats fraudulent tax reporting. However, only two refund
claims have been referred to this unit for review from inception through March 2004
because MVD lacks guidelines specifying the criteria under which potentially falsified
refund claims will be referred to this unit.
MVD should develop better refund process
MVD needs to take several steps to help ensure that refunds are valid and accurately
processed. These include updating its procedures for refund processing, improving
oversight of the refunds process, requiring adequate documentation to substantiate
claims, and better guiding taxpayers by revising its claim forms and instructions. All
of these procedures are used in a number of other states that auditors contacted.
MVD should update procedures for processing refunds—MVD should
update its current procedures and implement additional, written operational
procedures to guide refund processing. Although MVD has refund processing
procedures, these procedures do not reflect the current process since some of the
procedures are no longer relevant and certain statutes referred to in the procedures
have been repealed or changed. Further, MVD’s procedures do not specify
requirements for various steps in the processing of refund claims including
specifying all of the documents required to substantiate a claim, the process for
assessing the validity of a claim, the process to confirm authorized claim signatures,
and the levels of review required for different claim amounts. Therefore, MVD should
update its procedures and establish additional procedures that document and
describe these various steps. Once MVD develops and implements these
procedures, it should ensure all staff involved in the processing of fuel tax refund
claims are trained on these procedures.
Improved oversight needed—MVD should improve its oversight of fuel tax
refunds claim processing. MVD currently lacks oversight procedures for the staff who
process the refund claims and review the appropriateness and accuracy of these
claims. For example, according to an MVD supervisor, current supervisory oversight
focuses on the mathematical accuracy of the refund calculation and data entry, not
on the validity of the claim. Further, MVD should establish two supervisory levels to
Updated procedures
needed for processing
refunds.
1 The Council of State Governments and the Council of Governor’s Policy Advisors. Road Fund Tax Evasion: A State
Perspective. Lexington, KY.: 1996.
2 U.S. Department of Transportation, Federal Highway Administration. Fuel Tax Evasion: The Joint Federal/State Motor Fuel
Tax Compliance Project. June 1992.
Office of the Auditor General
page 23
approve refunds based on the refund amount to help ensure refund accuracy and
appropriateness prior to payment. For example, according to a manager with the
Texas State Comptroller’s Office, two processing staff must review and approve
claims of approximately $1,000, while supervisory review is required for claims over
$10,000. According to an official with Washington’s Department of Licensing, a
manager must approve claims over $5,000, and two signatures are needed for those
over $10,000. Supervisory responsibility should include review of data input
summaries, as well as compliance reviews of individual refunds, to ensure unit
procedures are followed, claim documentation requirements are met, and
calculations are accurate.
Improved oversight should also include a defined role for ADOT’s Office of Audit and
Analysis and MVD’s Fuel Tax Evasion Unit. Audits of refund payments have been
inconsistently performed and MVD does not require the Refund Unit’s supervisor to
periodically audit completed transactions in detail. While MVD planned 35
compliance reviews of refund payments during fiscal year 2003, only one review was
conducted. Management attributed the incomplete reviews to limited personnel.
However, during the audit, MVD assigned a staff person to the Refund Unit who will
review claims for validity prior to payment.
In addition, ADOT’s Office of Audit and Analysis should implement a plan to audit an
adequate number of high-dollar refunds and a random sample of other refunds
annually. Other states conduct such audits. For example, according to an official with
the Washington Department of Licensing, field auditors are required to annually
conduct refund claim audits, in addition to other audits of suppliers and interstate
truckers. Further, the Tennessee Department of Revenue, Petroleum Tax Division
conducts field audits of a sample of refunds and for other refunds if a claim appears
questionable. MVD could also refer questionable refund claims to its Fuel Tax
Evasion Unit for field review. Because questionable claims should be consistently
referred for review, MVD should identify criteria for referring a refund claim to its Fuel
Tax Evasion Unit.
MVD should require adequate claim substantiation—Similar to other
states, MVD should strengthen taxpayer requirements to support refund claims. The
ADOT director currently has statutory authority to require any documentation
deemed necessary to support a refund claim. Particularly important is better
documentation to support off-highway fuel tax refunds as these refunds represent
one of the largest categories of refunds MVD issues. For example, Texas and
Tennessee require off-highway users of fuel to maintain documentation showing the
fuel dispensed from the bulk storage tank to the equipment. In addition, Texas
completes a field audit on receipt of a company’s initial claim to ensure the
equipment listing is accurate. In contrast, MVD does not conduct such a check.
Audits of refund claims
should occur annually.
Refund review and
authorization needed
prior to payment.
State of Arizona
page 24
Additionally, gasoline vendors applying for the $0.08 differential refund could be
asked to submit documentation to substantiate their sales at the lower price. As
mentioned previously, statute already requires vendors to maintain this
documentation.
MVD should improve taxpayer instructions—MVD could also assist Arizona
taxpayers by providing better claim forms and instructions. While MVD has
informational booklets and Web site information that answers some questions
regarding fuel tax refunds, MVD’s current forms do not provide line-by-line
instructions for the user. Additionally, the forms lack information defining eligibility for
fuel tax refunds and do not detail requirements for submitting supporting
documentation.
MVD should provide clear and comprehensive forms and instructions to better assist
taxpayers and potentially reduce filing errors. Auditor review of eight other states’
refund forms and instructions shows that these states better explain how to complete
refund claims.1 For example, states such as California and Idaho include line-by-line
instructions for the completion of claim forms. Additionally, California’s and Idaho’s
forms are more comprehensive, instructing the user about exemptions, filing periods,
and necessary signatures to support the refund claim.
1 Auditors reviewed refund claim forms from California, Florida, Idaho, Missouri, North Carolina, Tennessee, Texas, and
Washington. Similar to Arizona, these states, except for Texas, collect fuel taxes at the distribution storage facility. Texas
is in the process of converting to that point of taxation.
Recommendations
1. MVD should update its current procedures and implement additional, written
procedures that document the steps and requirements for processing,
validating, reviewing, and issuing fuel tax refund claims.
2. Once it has updated its procedures and implemented additional procedures,
MVD should ensure that all staff involved in the processing and review of fuel tax
refund claims are trained on the procedures.
3. To help ensure appropriate oversight and monitoring of the refunds process,
MVD should establish and implement procedures requiring:
a. Two levels of refund approval based on the refund amount;
b. Supervisory review of the accuracy and validity of all refunds before they are
issued and requiring that questionable refund claims be referred to its Tax
Evasion Unit for review; and
c. Independent audits by ADOT’s Office of Audit and Analysis of a random
sample of refund claims annually based on a systematic audit plan.
4. MVD should strengthen the requirements that stipulate the documentation
taxpayers must maintain to support refund claims and the documentation
taxpayers must submit with their refund claims.
5. MVD should develop more comprehensive forms and instructions for taxpayer
claims to assist taxpayers in the filing of claims and help ensure that MVD has
all required information to process and verify refund claims.
Office of the Auditor General
page 25
State of Arizona
page 26
Office of the Auditor General
page 27
MVD should examine its fees
While fees assessed by MVD generate significant revenue for the State, MVD should
continue with its recently initiated process to examine these fees to ensure they are
necessary and sufficient to cover its costs. According to MVD reports, MVD
generated over $150 million in fiscal year 2003 through fees and assesses over 350
different fees. MVD has not reviewed these fees to determine whether, for example,
some might no longer be appropriate or might be set too low to cover the cost of
providing the associated service. However, in January 2004, MVD established a
working group to evaluate its fees. Using a structured process that considers both
cost and other information and collects needed cost data for analysis would enhance
this working group’s efforts. Additionally, using such an approach could result in
useful recommendations for legislative consideration.
Purpose of fees
At all levels of government, the assessment of fees serves a variety of purposes,
including recovering the costs of providing a service, generating revenue, and
reducing the demand for services. Specifically, according to a Texas A&M University
study on state sales and income taxes, fees are generally considered to be an
appropriate tool for recovering the cost of providing a specific service to an
individual.1 Additionally, according to literature, user fees can be based on the costs
of providing the associated service, including operating and capital costs.2
MVD generated over
$150 million in fiscal
year 2003 through fees.
1 Zodrow, George R. State Sales and Income Taxes: an Economic Analysis. College Station: Texas A&M University Press,
1999.
2 Fisher, Ronald C. State and Local Public Finance. Chicago: Irwin, 1996.
FINDING 3
State of Arizona
page 28
Some MVD fees may be unnecessary or inappropriately
established
Until recently, MVD did not have a process in place to periodically review the over 350
fees it charges, and there are several reasons to question whether some fees are
needed or appropriate. For example, some fees are outdated or are too low, and
might not cover the cost of the services provided. In addition, MVD provides one
service without charging any fee.
MVD has historically lacked process to review fees—Despite
responsibility for assessing and collecting hundreds of fees, MVD has not reviewed
the necessity or adequacy of these fees. Based on auditors’ review of statutes and
administrative rules, MVD currently has the authority to assess over 350 fees. As
illustrated in Table 5 (see page 29), MVD charges these fees to provide a variety of
services including vehicle title and registrations, specialized license plates, and
driver’s licenses. Statute either establishes a fee or requires the ADOT director or his
designee to establish the fee in administrative rule. Based on auditors’ review,
approximately 86 percent of MVD’s fees are established by statute, with the
remaining fees established in administrative rule. Additionally, statute also either
specifies the fee amount, establishes a maximum fee amount that MVD can assess,
or requires the director to establish a fee that covers all or part of the cost of providing
the service.
MVD has not conducted a comprehensive review of the necessity or appropriateness
of its fees. However, in January 2004, MVD established an internal working group
consisting of personnel from ADOT and MVD specializing in budgeting and
purchasing, finance, revenue, and economics to begin reviewing its fees. MVD also
indicated it plans to solicit input from the Joint Legislative Budget Committee and
Governor’s Office of Strategic Planning and Budgeting. This initial working group
plans to determine what should be done to evaluate the fees. In the next phase, MVD
plans to have its staff analyze the fees.
Some fees may be too low or unnecessary—Because MVD’s fees have not
been reviewed and updated for many years, some common fees assessed by MVD
may be too low or may not be needed. Specifically:
􀁺􇩁 Amounts of some fees outdated—Changes to the over 300 fees established in
statute have been infrequent. Specifically, the Legislature has revised
approximately 20 fees since 1997. As a result, fees may no longer be adequate
because of inflation and the increasing costs of providing services. This is
particularly true for fees that have remained unchanged for periods of 30 or
more years. For example, vehicle title fees have remained at $4 for more than 30
years. Adjusting this fee for inflation using a U.S. Bureau of Labor Statistics
formula yields a value of $18.29 in 2003.
Some fees have not
been revised for 30 or
more years.
Office of the Auditor General
page 29
Table 5: Common MVD Fees
Fiscal Year 2003
Type of Fee/Specific Fee
Purpose
Fee Amount
or Range
Statute
Establishing Fee
Certificates of Title and Registration
Vehicle inspection Identify the vehicle $ 0 to 50 A.R.S. §28-2011
Level I 0
Level II 20
Level III 50
Certificate of title Identify the owner of a vehicle 4 A.R.S. §28-2003
Registration of motor vehicle Register the vehicle with the State 8 A.R.S. §28-2003
License Plates
License plate Provide a license plate to a
registered owner of a vehicle
0 A.R.S. §28-2351
Honored military license plate
Ex: Pearl Harbor survivor license
plate
Provide a special license plate to a
registered owner of a vehicle
25
A.R.S. §28-2455
Pearl Harbor survivor license
plate renewal
Annually renew an honored military
license plate
5 A.R.S. §28-2455
Motor Vehicle Driver’s Licenses
Class D Driver’s License
(with a written test)
Authorize an individual to drive a
motor vehicle
10 A.R.S. §28-3002
Class D Driver’s License
(no test required)
Authorize an individual to drive a
motor vehicle
10 to 25 A.R.S. §28-3002
Age 50 or older 10
Age 45 to 49 15
Age 40 to 44 20
Age 39 or younger 25
Class M Driver’s License Authorize an individual to drive a
motor vehicle
10 to 25 A.R.S. §28-3002
Age 50 or older 10
Age 45 to 49 15
Age 40 to 44 20
Age 39 or younger 25
Highway Use Fees
46 different fees Charge for commercial motor
vehicle based on the age and
weight of the vehicle
50 to 2,217
A.R.S. §28-5471
Source: Auditor General staff analysis of common MVD fees established by Arizona Revised Statutes.
State of Arizona
page 30
Additionally, the $4 fee may not reflect the costs for MVD to process and issue
a vehicle title. Although MVD does not have specific cost information, one MVD
manager estimated that a title transaction requires about 20 minutes of a
customer service representative’s time. If so, the current $4 fee may not cover
the average costs of the customer service representative’s salary and benefits,
not to mention overhead costs or the additional costs for preparing the title.
According to MVD reports, MVD issued more than 2.5 million titles in fiscal year
2003, yielding more than $9.8 million in revenue. If this fee were increased 50
percent to $6, it could generate an additional $5 million annually.
􀁺􇩃 Costly to collect very small fees—Some fee amounts are so low that MVD might
not recover its costs to collect them. Auditors’ review found that over 90
statutorily required fees are set at $10 or less. More than 40 of these fees are $5
or less, and 4 of these fees are only $1. For example, MVD charges a $1 fee for
such services as issuing a one-trip registration permit, a temporary registration
fee for a commercial truck, or a title for a vehicle repossessed by the seller.
􀁺􇩆 Fees lower than other states’ fees—Although a few fees may be comparable to
those of other states, the fees that MVD can charge for some common
transactions are generally lower than the fees charged by other states for
comparable transactions.1 Based on auditor review of MVD transactions,
auditors selected six common transactions for comparison to similar
transactions in other states. As illustrated in Table 6 (see page 31), while
Arizona’s fees for duplicate registrations are comparable with fees in other
states, the fees for duplicate licenses are significantly lower than those of other
states.
One service not covered by a fee—While the Legislature established three
levels of vehicle title inspections to verify the vehicle identification prior to
registration, MVD has authority to assess fees only for the second and third
levels of inspections.2 MVD does not have statutory authority to assess a fee for
Level I vehicle title inspections. In fiscal year 2003, MVD reports providing nearly
277,000 of these Level 1 inspections. In many cases, these inspections require
staff travel time to inspect vehicles at offsite locations, in addition to the time
required to conduct the actual inspection and process the paperwork.
Arizona’s fees are lower
than similar fees in other
states.
1 California, Colorado, Nevada, New Mexico, Texas, and Utah were selected for comparison based on their geographic
and demographic similarity to Arizona.
2 Level I inspections consist of visual confirmation of a vehicle’s identification number. When information is insufficient for
a Level I inspection, MVD performs a Level II inspection, which confirms the vehicle’s identity through a search of the
vehicle for a confidential vehicle identification number. Level III inspections are similar to Level II inspections, but require
a search of the vehicle to find the more confidential vehicle identification numbers.
Office of the Auditor General
page 31
MVD’s working group should establish a fee-setting
process
MVD’s newly formed working group should continue with its efforts to assess the
necessity and appropriateness of its fees. To facilitate this review of its fees, MVD’s
working group should develop a uniform process to systematically evaluate and
review its fees, possibly using a model developed in Mississippi. MVD should also
develop and collect the data and information needed to analyze the costs of
providing the services associated with the fees it reviews. Finally, once it completes
its analysis and review, MVD should recommend appropriate fee revisions for
legislative consideration
MVD should systematically review fees—MVD’s recently established
working group should ensure that fees are set at appropriate levels and reviewed
periodically. According to an MVD official, as of April 2004, this working group has
identified some of the fees it plans to review based on the frequency of the
associated transaction. These include vehicle title and registration fees. Additionally,
the group has begun to benchmark these fees and transactions to similar
transactions in Washington. In addition to focusing on high-volume transactions, the
group should identify and review any fees that, given their size and frequency of use,
do not appear to be cost-effective to collect or potentially unnecessary.
Table 6: Comparison of Selected State Fees
As of May 2004
Arizona
California
Colorado
Nevada
New
Mexico
Texas
Utah
Automobile title $4 $15 $9.50 $20 $ 3.50 $28 a $ 6
Motorcycle title 4 15 9.50 20 3.50 28 a 6
Duplicate title 4 15 8.20 20 15.00 2 6
Duplicate registration 4 15 2.20 a 5 3.50 5.30 a 4
Duplicate plate 5 15 5.54 a 10.50 15.50 5.30 a 5
Duplicate driver’s license 4 19 8.10
or 15.60 a,b
16.25
16.50 10 13
a Represents minimum fees charged in these states.
b $8.10 applies to those aged 60 and older, while $15.60 fee applies to those aged 21 to 59.
Source: Auditor General staff review of motor vehicle fees for Arizona and other states.
State of Arizona
page 32
For the fees it reviews, MVD should either follow or develop a structured approach to
evaluate, establish, and review its fees. Such an approach has been developed by
the Joint Legislative Committee on Performance Evaluation and Expenditure Review
(PEER) in Mississippi.1 As illustrated in Figure 3 (see page 33), PEER’s decision
model for state government fee-setting is systematic, consistent with the literature on
fees reviewed during this audit, and would be appropriate for Arizona’s MVD to
follow. Following such a model would allow MVD’s working group to systematically
review its fees by determining whether the fee is needed, its purpose, and whether it
should be set at a level to recover its costs.
Cost data and other information needed—In addition, MVD needs to
develop and collect basic cost and other information related to its fees and the
services associated with the fees. While a fee review requires substantial information
on specific service costs, this information is not readily available at MVD. MVD
maintains some revenue and transaction data that may be useful for its fee review
and analysis. However, MVD lacks sufficient service cost data and information to
accurately determine the costs of the services associated with its fees. Therefore,
MVD should begin to collect the cost, revenue, and transaction data and information
needed to appropriately review and analyze its fees. To manage the impact of this
work on its limited resources, MVD should undertake to collect this data and
information only on the fees that it selects for review and analysis.
Legislative action needed to revise most fees—Once MVD has completed
the review and analysis of its fees, and has developed specific recommendations to
change fee amounts, legislative action will be needed. While MVD can change the
small number of fees that are established in administrative rule, those established in
statute require legislative action. However, fees established in statute can be difficult
to revise because, under Arizona’s Constitution, the approval of two-thirds of the
Senate and two-thirds of the House (a supermajority of the Legislature) is required to
increase a statutory fee. Nonetheless, based on its research and analysis, MVD
should recommend appropriate fee revisions for legislative consideration.
MVD should follow
structured approach to
review fees.
MVD should collect cost
and transaction data
needed for fee review.
1 Mississippi Joint Legislative Committee on Performance Evaluation and Expenditure Review. State Agency Fees: FY 2001
Collections and Potential New Fee Revenues. Jackson, Miss.: Dec. 2002.
Office of the Auditor General
page 33
Consider these factors:
— Should the fee cover the cost of providing the service?
— Should the fee reflect the price a business would charge for
providing a similar service?
— Should the fee be set at a particular level to influence demand?
— Should the fee be set at a particular level to influence behavior?
Consider these factors:
— What are the total costs, direct and indirect, of providing the
service?
Mississippi Joint Legislative Committee on
Performance Evaluation and Expenditure Review
Structured Fee-Setting Process
Developed for State Government
Figure 3:
Consider these factors:
— Are operations efficient enough to prevent costs from
being excessive?
— What effect will the fee have on annual revenue?
— What do other, similar states charge for the service?
— What effect will a fee change have on people with low or
middle incomes?
— Will the public accept the necessity and appropriateness
of the fee?
Consider these factors:
— Are fees limited by statute?
— If so, is legislation required to change them?
— Is there an obligation to provide the service to all citizens?
Consider these factors:
— Who benefits from the service: individuals, the public,
or both?
- Fees should be used to finance services that benefit individuals.
- Taxes should be used to finance services that benefit the public.
- When both individuals and the public benefit from a service, financing
can come from both fees and taxes.
Determine the estimated fees
Identify costs of collecting the fees
Assess factors influencing the
fee amount
Identify the purpose of the fee
Identify and analyze legal issues
Determine whether fees or taxes
should fund a service
Source: Auditor General staff analysis of fee-setting model included in the State Agency Fees:
FY2001 Collections and Potential New Fee Revenues report prepared by the Mississippi
Joint Legislative Committee on Performance Evaluation and Expenditure Review.
Recommendations
1. MVD should continue with its recently initiated process to evaluate its fees.
MVD’s newly formed working group should use a systematic approach that
includes the following steps:
a. Identify fees that are not cost-effective to collect or that are no longer
needed;
b. Evaluate fees that represent a significant amount of revenue or a relatively
large number of transactions;
c. Perform a fee-by-fee analysis of the selected fees using a structured
approach for determining the costs of the services;
d. Recommend appropriate fee changes to the Legislature.
2. For those fees that the working group analyzes, MVD should collect the
necessary cost, revenue, and transaction data and information on the actual
cost of services provided and associated fees charged.
State of Arizona
page 34
1 These vehicle registration renewal figures do not include renewal transactions completed with other transactions, such
as lost plates or change of address.
Office of the Auditor General
page 35
MVD should better protect registration renewal
fees
Despite receiving over $15.7 million a month in mail-in vehicle registration renewals,
the Motor Vehicle Division (MVD) lacks adequate controls to protect these monies.
Through March of fiscal year 2004, MVD processed an average of nearly 3,900 mail-in
registration renewals and deposited between $639,000 and $918,000 each day.
MVD should take steps to protect these payments, including restricting employee
access to these monies, immediately endorsing and depositing checks and money
orders upon receipt, and tracking receipts through the registration renewal process.
Vehicle registration renewals
Mail-in registration is the most common approach used by Arizona residents to
renew their vehicle registrations. Through March of fiscal year 2004, more than 34
percent of registration renewals were received via the mail, while nearly 31 percent of
renewals were processed by MVD field offices and drop boxes, and 27 percent were
from Internet transactions.1 The remaining 8 percent of registration renewals were
handled by third-party administrators and fleet transactions.
MVD has a Renew-by-Mail Unit to process mail-in registration renewals. According
to MVD reports, this unit processes approximately 83,000 mail-in registration
renewals and deposits an average of over $15.7 million each month. During the
audit, MVD officials reported that the Renew-by-Mail Unit was anywhere from 6 to 10
days behind in processing registration renewals. As of February 4, 2004, MVD
reported a 6 and-a-half day backlog in processing mail-in registration renewals.
Based on this reported backlog and the average daily deposits for the first 9 months
of fiscal year 2004, MVD could have as much as $4.76 million in mail-in vehicle
registration renewal payments at its processing facility on a given day.
MVD receives over
$15.7 million monthly in
mail-in registration
renewals.
FINDING 4
MVD does not adequately safeguard registration renewal
payments
MVD lacks adequate policies and procedures to protect vehicle registration renewal
monies processed by its Renew-by-Mail Unit. Specifically, this unit does not use
appropriate procedures in all areas of its cash-handling process. For example, the
unit allows unnecessary access to vehicle registration renewal monies, does not
endorse checks and money orders immediately upon receipt, and does not track
these monies through the registration renewal process. MVD should take action to
correct these problems, and also document and regularly review its cash-handling
policies and procedures.
Insufficient procedures over check processing—MVD’s current
procedures for processing registration renewal payments fail to sufficiently protect
state monies during processing. The current process proceeds as follows: First,
MVD’s processing unit has a mailroom clerk who opens, bundles, and places the
day’s mail in bins in the mailroom. This mail is left in an unsecured area for up to 10
days until it is distributed to customer service representatives for processing. Once
these representatives verify that the appropriate fee and documents have been
submitted, the payment and renewal documentation is bundled and forwarded to
another area for data entry into the MVD title and registration system. After this, a
deposit clerk verifies, endorses, and prepares these monies for deposit. This process
has the following weaknesses:
􀁺􇩁 Access to receipts not restricted—MVD does not adequately restrict access to
registration renewal payments. In addition to the 29 employees in the Renew-by-
Mail Unit, staff uninvolved with processing also have easy access to vehicle
registration renewal payments. Specifically, the janitorial staff and employees in
other units at the MVD field office also have access to the unendorsed checks
and money orders. By failing to limit employee access to checks and money
orders, MVD increases the potential for loss or theft.
MVD can reduce unnecessary access to these monies by strengthening its
control over monies stored in the mailroom, the processing area, and individual
processing workstations. First, MVD should limit mailroom access to necessary
staff. Second, MVD should securely store all registration renewal payments by
retaining all checks and money orders in an adequate physical facility (fireproof
safe, locking filing cabinet) until ready for processing. Additionally, checks
should not be left unattended and unsecured at workstations, but should be
stored in a locking physical facility when left unattended. By retaining all
registration renewal payments in an acceptable physical facility, MVD will be in
compliance with the State of Arizona Accounting Manual and diminish the risk of
loss or theft of state monies.
State of Arizona
page 36
Too many people have
access to registration
payments.
Office of the Auditor General
page 37
􀁺􇨠 Checks not endorsed immediately—MVD does not safeguard its checks and
money orders through restrictive endorsement until the very end of the
registration renewal process. According to an MVD supervisor, it takes
approximately 1 day to process the vehicle registration renewal payments.
However, these payments are not endorsed for several days due to the
processing unit’s backlog. Additionally, during the actual registration renewal
process, at least five employees handle these checks as part of their normal job
function, making it more difficult to trace potentially lost or stolen payments.
Restrictively endorsing a check helps prevent unauthorized individuals from
depositing the money. The State of Arizona Accounting Manual requires that all
checks and money orders be immediately restrictively endorsed, and payments
received must be deposited on a timely (daily) basis. As such, MVD should
consider two options to better protect these monies and comply with state
requirements. Specifically, if MVD could reduce its processing backlog, it could
process, restrictively endorse, and deposit registration renewals the same day
they are received. However, until the backlog can be reduced, the other option
is for MVD to prepare a receipt noting the check information and payment
amount and attach this receipt to the accompanying registration renewal
documentation. Payments would then be placed in a safe or locking cabinet
during processing. Once the customer service representatives verify that the
payment amount and associated documentation are complete and accurate,
MVD could then deposit these monies. Either one of these procedures would
better safeguard receipts and minimize employee access to these monies
during processing.
􀁺􇩒 Receipts not tracked—Throughout the registration renewal process, MVD fails
to track vehicle registration renewal monies. Specifically, MVD does not have a
mechanism in place to help ensure that all registration renewal payments
received are processed. When mail is initially received and bundled, the unit
does not prepare a mail log. Further, the unit does not track the distribution of
these registration renewal payments throughout processing.
To again better safeguard these monies, MVD should assign a unique identifier
to each mail bundle and create a daily mail log documenting the total count for
the corresponding bundle. The State of Arizona Accounting Manual requires that
mail logs be prepared for all receipts received through the mail. MVD should
also use a batch log to document each item distributed to the different
processing clerks. The mail log and processor batch logs could be used to track
renewals if the deposit receipts and title and registration data do not reconcile.
These additional safeguards would decrease the potential for loss and theft and
ensure that each payment received is processed.
MVD should better track
mail-in registration
payments.
Document cash-handling procedures—Once MVD institutes these changes,
it should document policies and procedures governing registration renewal
payments. Specifically, MVD should document policies for handling cash and cash-like
receipts. These policies and procedures should incorporate the recommended
changes to the Renew-by-Mail Unit’s cash-handling process and define employee
responsibilities for each step in the process. Additionally, to help ensure it establishes
and adheres to appropriate cash-handling policies and procedures, MVD should
periodically request a procedural review from ADOT’s Office of Audit and Analysis,
which conducts internal audits of ADOT functions. Such a review analyzes an
organization’s processes and looks for internal control weaknesses. By regularly
reviewing its internal controls, MVD can ensure its procedures effectively safeguard
state monies.
Recommendations
1. MVD should establish and maintain the following processes and procedures to
better safeguard registration renewal monies:
a. Store registration renewal payments in an adequate physical facility, such
as a safe or locking storage cabinet, and limit access to necessary
employees;
b. Limit mailroom access to necessary employees;
c. Immediately endorse all checks and money orders upon receipt by
processing registration renewals the same day they are received, or
generate a record of money received, such as a receipt, to accompany
registration renewal documentation during processing;
d. Create and use a daily mailroom log that documents the number of
envelopes for each bundle of mail;
e. Create and use a batch worksheet that tracks the distribution of mail before
and during processing;
f. Develop and implement policies and procedures for handling cash and
cash-like receipts that incorporate the recommended changes made in this
report and define employee responsibilities for each step in the cash-handling
process; and
g. Periodically request a procedural review from ADOT’s Office of Audit and
Analysis to ensure it establishes and adheres to appropriate cash-handling
policies and procedures.
State of Arizona
page 38
Office of the Auditor General
OTHER PERTINENT
INFORMATION
page 39
As part of this audit, auditors gathered other pertinent information regarding ADOT
and MVD efforts to reconcile the MVD cash-clearing account accurately and in a
timely manner. MVD deposits most of the revenue that it collects into a cash-clearing
account. Accurate reconciliation of the monies deposited into the account with
amounts shown in the State Accounting System is critical to ensure the accurate
distribution of these monies to various funds, including HURF. However, reconciling
the cash-clearing account with other records has been a long-standing problem.
While ADOT and MVD have made significant progress in improving the timeliness
and accuracy of its reconciliations, some differences continue.
Reconciling MVD’s cash-clearing account critical—MVD’s Revenue
Accounting Unit has the responsibility for reconciling the cash-clearing account.
Routinely performing reconciliations provides an effective mechanism to help ensure
that all monies received are deposited and to review account activity. Additionally, the
State of Arizona Accounting Manual requires all agencies to reconcile their internal
records to the State Accounting System (AFIS). To comply with this requirement,
MVD must reconcile daily transactions reflected in its cash-clearing account on its
TARGATS system to AFIS. MVD uses its TARGATS system to record daily
transactions, including monies collected from its 60 field offices. However,
reconciling cash balances recorded in AFIS and TARGATS is complex due to the
massive volume of transactions MVD processes, including the need for manual
transactions, because TARGATS is inadequate for current processing needs.
Reconciling cash account has been a long-standing problem—
Multiple internal and external audit reports have identified the lack of current and
accurate reconciliations as a long-standing problem. For example, in a June 1997
internal audit report, ADOT auditors concluded that periodic reconciliations, a key
control to ensuring the clearing account’s accuracy, were not required by MVD
policies or performed. Additionally, in the Arizona Department of Transportation’s
(ADOT) fiscal year 2002 management letter, ADOT’s external auditors indicated that
as of June 30, 2002, MVD was 17 months behind schedule in reconciling the cash
balance between its TARGATS system and AFIS.
Multiple audits have
identified inaccurate and
untimely reconciliations
as a long-standing
problem.
In addition, various audit reports identified a significant cash difference between
MVD’s cash-clearing account on its TARGATS system and AFIS. In the 1997 internal
audit report, ADOT’s auditors indicated that an attempted reconciliation of the cash-clearing
account to AFIS at December 31, 1995, reflected an unidentified difference
of approximately $10 million. Further, in the fiscal year 2002 management letter,
ADOT’s external auditors reported that while MVD staff do not know the exact nature
of this difference, they believe that MVD may have over-distributed collections to
HURF, other state agencies, or cities and counties. However, according to MVD
officials, because this cash difference occurred many years ago, MVD does not have
any documentation to indicate what may have caused this difference between the
two systems.
Steps taken to improve reconciliation timeliness—In response to the
recommendations made in the various audit reports, MVD has allocated additional
resources to performing reconciliations and improved its reconciliation procedures,
while ADOT has accounted for a $9.5 million unreconcilable difference. Specifically:
􀁺􇩁 Added additional resources—MVD allocated additional resources to help
become current with the reconciliation of the cash-clearing account. In the fall of
2002, MVD devoted one full-time person to completing the clearing account
reconciliation. With the help of this new staff person and some temporary staff,
MVD has made progress in becoming current with the reconciliations. Prior to
this time, MVD did not have a specific employee assigned to perform this
function, but had assigned it to a staff person who had many other
responsibilities.
􀁺􇩒 Reviewing and improving reconciliation process—MVD is reviewing its current
reconciliation process and establishing improved procedures. Specifically, in
July 2003, MVD staff identified several improvements to the reconciliation
process and is in the process of developing reconciliation procedures. Also,
according to MVD officials, MVD has implemented computer-based
improvements to facilitate data flow and eliminate accidental data modification.
Prior to these improvements, the reconciliation process required manual data
entry, which increased the likelihood of errors.
In addition to these efforts, MVD has established the following guidelines and goals:
􀁺􇩁 Accuracy of reconciliations—MVD established a short-term guideline to
reconcile within +/- $25,000 for each monthly reconciliation. As illustrated in
Table 7, (see page 41), since April 2003, MVD monthly reconciliations have
produced monthly differences between AFIS and TARGATS totaling less than
$11,000. These differences are well within MVD’s stated goal to reconcile the
account to within $25,000. However, monthly reconciliations still result in
differences. Specifically, according to the November 2003 reconciliation, MVD
has accumulated a difference of nearly $788,000 in its cash-clearing account
State of Arizona
page 40
MVD has improved its
reconciliations.
from July 2000 through October 2003.
According to an MVD official, after the unit
becomes current with the reconciliations,
MVD staff will begin to research and resolve
these accumulated differences in the cash-clearing
account.
􀁺􇨠 Defining “current”—MVD defined current as
having the reconciliation prepared 2 months
after the end of the month. For example, the
March 2004 reconciliation would be
considered current if reconciled before the
end of May 2004. As of March 2004, MVD was
only 3 months behind in its reconciliations.
However, MVD has established a long-term
goal to reconcile the cash-clearing account 3
weeks after the end of the month.
􀁺􇨠 Accounting for cash difference—According to
ADOT officials, in consultation with an
Attorney General representative, ADOT has
accounted for a $9.5 million unreconcilable
difference between TARGATS and AFIS. In
July 2003, ADOT management recorded a
$9.5 million accounting entry to resolve that
part of the reconciling difference in the cash
balance between AFIS and TARGATS.
Office of the Auditor General
page 41
Table 7: Cash Balance Unreconciled Differences
Between the MVD System and
the State’s General Fund Ledger
September 2002 through November 2003
Month
Unreconciled
Difference
September 2002 $(325,766)
October 297,342
November (79,705)
December (6,670)
January 2003 217,677
February (6,260)
March 53,489
April (4,006)
May (7,393)
June 2,334
July 10,524
August (5,604)
September (3,081)
October 6,387
November (26)
Source: Auditor General staff analysis of the Arizona Department of
Transportation Motor Vehicle Division cash-clearing account
reconciliation as of November 2003.
State of Arizona
page 42
Office of the Auditor General
AGENCY RESPONSE
02-09 Arizona Health Care Cost
Containment System—
Sunset Factors
02-10 Department of Economic
Security—Division of Children,
Youth and Families, Child
Protective Services
02-11 Department of Health
Services—Health Start
Program
02-12 HB2003 Children’s Behavioral
Health Services Monies
02-13 Department of Health
Services—Office of Long Term
Care
03-L1 Competitive Electric Metering,
Meter Reading, and Billing
and Collections
03-01 Government Information
Technology Agency—
State-wide Technology
Contracting Issues
03-02 Registrar of Contractors
03-03 Water Infrastructure Finance
Authority
03-04 State Board of Funeral
Directors and Embalmers
03-05 Department of Economic
Security—Child Protective
Services—Foster Care
Placement Stability and
Foster Parent Communication
03-06 Arizona Board of Appraisal
03-07 Arizona Board for Charter
Schools
03-08 Arizona Department of
Commerce
03-09 Department of Economic
Security—Division of
Children, Youth and Families
Child Protective Services—
Caseloads and Training
04-L1 Letter Report—Arizona Board
of Medical Examiners
04-L2 Letter Report—Gila County
Transportation Excise Tax
04-01 Arizona Tourism and
Sports Authority
04-02 Department of Economic
Security—Welfare Programs
04-03 Behavioral Health Services’
HB2003 Funding for Adults
with Serious Mental Illness
04-04 Department of Emergency and
Military Affairs and State
Emergency Council
04-05 Department of Environmental
Quality—Water Quality Division
04-06 Department of Environmental
Quality—Waste Programs
Division
04-07 Department of Environmental
Quality—Air Quality Division
04-08 Department of Environmental
Quality—Sunset Factors
Performance Audit Division reports issued within the last 24 months
Future Performance Audit Division reports
Arizona Department of Transportation, Motor Vehicle Division—Information
Security and E-government Services
Arizona Department of Transportation, Motor Vehicle Division—Sunset Factors