Sunset review, Department of Administration, sunset factors

              Sunset Review
Department of
Administration–
Sunset Factors
Performance Audit Division
Debra K. Davenport
Auditor General
SEPTEMBER • 2005
REPORT NO. 05 – 13
A REPORT
TO THE
ARIZONA LEGISLATURE
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 services
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
Senator Robert Blendu, Chair Representative Laura Knaperek, Vice Chair
Senator Carolyn Allen Representative Tom Boone
Senator Gabrielle Giffords Representative Ted Downing
Senator John Huppenthal Representative Pete Rios
Senator Harry Mitchell Representative Steve Yarbrough
Senator Ken Bennett (ex-officio) Representative Jim Weiers (ex-officio)
Audit Staff
Melanie Chesney, Director
Dale Chapman, Manager and Contact Person
Tara Nielson
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 44th 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 28, 2005
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Jerry Oliver, Interim Director
Department of Administration
Transmitted herewith is a report of the Auditor General, A Sunset Review of the Department of
Administration. This report is in response to a November 20, 2002, resolution of the Joint
Legislative Audit Committee and was conducted as part of the sunset review process prescribed
in Arizona Revised Statutes §41-2951 et seq.
As outlined in its response, the Department of Administration 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 29, 2005.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
Office of the Auditor General
TABLE OF CONTENTS
concluded
1
7
5
Introduction & Background
Sunset Factors
Agency Response
Table:
1 Schedule of Administrative Revenues and Expenditures,
in Thousands
Years Ended June 30, 2003, 2004, and 2005
(Unaudited)
page i
State of Arizona
page ii
The Office of the Auditor General has conducted a review of the Arizona Department
of Administration (Department) using the 12 criteria in Arizona’s sunset law. The
analysis of the 12 sunset factors was conducted pursuant to a November 20, 2002,
resolution of the Joint Legislative Audit Committee and prepared as part of the sunset
review set forth in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
This sunset review is the last in a series of four reports of the Department. The other
three reports were performance audits of the Department’s Financial Services
Division, the Information Services Division and Telecommunications Program Office,
and the Human Resources Division.
Organization
The Department is divided into nine functional areas. As of July 2005, the Department
reported it had 937.37 staff positions, with 132.21 vacancies. In addition to the
director’s office, which includes 7 filled positions, department staff work in the
following areas:
􀁺􇩁 Arizona Government University (12.75 filled positions)—Arizona Government
University (AzGU) administers the State’s centralized employee training
activities. It develops standardized curriculum, provides agencies with
information on outside training vendors, and partners with the State’s
community colleges and universities to provide college credit for some courses.
AzGU courses include ethics, management development, health and safety,
and time and project management.
􀁺􇩅 Enterprise Procurement Services (30 filled positions)—Enterprise Procurement
Services (EPS) was created in January 2005 and replaces the State
Procurement Office as the central procurement authority for the State. EPS
conducts strategic state-wide contracting for specific goods and services, and
procurements for individual agencies when the value of the procurement
exceeds the agency’s delegated procurement authority or upon request.1 EPS
1 Statute designates the department director as the central procurement officer for the State, responsible for procuring or
supervising the procurement of all materials, services, and construction needed by the State. Arizona Administrative Code
also authorizes the department director to delegate procurement authority to state agencies.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
also establishes and administers procurement policies and procedures,
establishes standards and manages procurement authority delegated to
agencies, and administers bid protests and claims appeals. Further, EPS works
with state agencies and political subdivisions to provide access to the EPS Web
site and automated procurement systems.
􀁺􇩇 General Accounting Office (61 filled positions)—The General Accounting Office
(GAO) is the State’s principal accounting office. It provides financial information
to state and federal government agencies, financial institutions, and other
interested public or private entities. Specifically, GAO operates the state-wide
accounting system and the state-wide payroll portion of the Human Resources
Information Solution. GAO also provides state-wide accounting policies and
procedures to state agencies; distributes and reconciles all state warrants;
provides a variety of data input, bookkeeping, reporting, and consulting services
to state agencies; prepares financial reports; performs internal audits, reviews,
and investigations of state agencies; and provides various types of technical
assistance on government accounting and financial matters.
􀁺􇩈 Human Resources Division (143.75 filled positions)—The Human Resources
Division provides a variety of services to state agencies and their employees.
The division administers the State’s self-funded health benefits program,
manages state employee counseling and wellness programs, maintains the
State’s job classification and compensation system, reviews employee
grievances involving discrimination or a violation of personnel rules, maintains
and administers the State’s Human Resources Information Solution system, and
maintains the State’s new online hiring and recruiting software. The division also
provides human resources services at the division’s seven satellite offices,
located at various state agencies and in Tucson; and manages a worklife
benefits program that focuses on nonsalary-related employee benefits, such as
on-site child care, alternative work schedules, and flex time, to help agencies
enhance recruitment and employee retention.
􀁺􇩉 Information Technologies and General Services (239.6 filled positions)—
Information Technologies and General Services is composed of the Information
Services Division and the General Services Division. These divisions perform the
following activities:
􀂈􈡉 Information Services Division—This division provides information
technology services and support both within the Department and to
approximately 50 other state agencies such as the Arizona Health Care
Cost Containment System and the Departments of Transportation and
Revenue. Services and support include activities such as mainframe and
other types of data processing, creating and maintaining Web sites, and
maintaining and providing technical support for the Department’s internal
network. The Department’s Data Center operates 24 hours per day, 7 days
State of Arizona
page 2
per week. Further, the division administers the Department’s 9-1-1
telecommunications services, which provide guidance and direction to the
various 9-1-1 programs across the State, and administers and disburses
the 9-1-1 excise tax that is deposited into the emergency
telecommunication services revolving fund.
􀂈􈡇 General Services Division—This division manages and operates 2,419
state-owned buildings and properties throughout Arizona, including
administering the acquisition, leasing, planning, inspection, and
construction of state facilities, and overseeing compliance with statutory
and building codes. The division also works with the Department of
Corrections and Juvenile Corrections to plan correctional facilities projects
and, as of July 2005, is overseeing the construction of three state prison
facilities. The Capitol Police, which are housed in this division, provide 24-
hour public and employee protection at the Capitol Mall and Tucson
Complex.
􀁺􇨠 Legal Services (7 filled positions)—Legal Services provides counsel on legal
issues throughout the Department, including advice regarding the Arizona
Procurement Code. It includes the HIPAA Compliance Office and the Governor’s
Regulatory Review Council, which has its own sunset date of July 1, 2007.1
􀁺􇩍 Maintenance and Facilities (204.5 filled positions)—Maintenance and Facilities
includes the Management Services Division and the Facilities Operations
Division. These divisions perform the following activities:
􀂈􈡍 Management Services Division—This division provides internal accounting
services for all department divisions. It oversees the State Boards Office,
which provides accounting services to small boards and commissions. The
division also manages all mandated travel reduction programs, which
encourage state employees in Maricopa County to carpool, bus, bicycle, or
walk to work, and telecommute; and houses the Arizona Office for
Americans with Disabilities, which provides technical assistance, training,
and guidance relevant to the Americans with Disabilities Act and other
disability-related legislation. Further, the division provides services for
printing, office machine repair, and mail handling; manages a fleet of 1,767
vehicles for state agency use; and manages the surplus property program.
􀂈􈡆 Facilities Operations Division—This division provides custodial, grounds,
and maintenance activities, such as painting, plumbing, window washing,
and heating and ventilation repair. It is responsible for managing and
maintaining the State’s physical assets and ensuring compliance with
1 HIPAA, the Health Insurance Portability and Accountability Act of 1996, primarily affects the operations of the
Department’s employee healthcare program and the occupational wellness program, as well as the use of healthcare
information in the operations of the Arizona Health Care Cost Containment System, and the Departments of Health
Services and Economic Security.
Office of the Auditor General
page 3
safety codes, environmental regulations, and other external compliance
and regulatory matters.
􀁺􇩒 Risk Management (89.56 filled positions)—Risk Management managed
approximately $51.7 million in property, liability, and workers’ compensation
claims costs for the State in fiscal year 2004. Specifically, Risk Management
provides insurance coverage to state agencies and employees for property,
liability, and workers’ compensation losses through self-insurance and
purchased insurance policies; investigates, mitigates, and settles all property
and liability claims against the State; recovers monies from third parties who
have injured the State; and assists agencies in the development and
administration of loss prevention programs. Also, Risk Management self-insures
and self-administers the State’s workers’ compensation benefits for injured state
employees; assists agencies in administering return-to-work programs; and
recovers monies from third parties who have injured state employees.
􀁺􇩔 Telecommunications Program Office (10 filled positions)—The
Telecommunications Program Office provides oversight for the State’s privatized
telecommunications services contractor and AZNET, the State’s privatized
telecommunications network. In January 2005, the Department awarded a 5-
year, approximately $40 million dollar annual contract to provide
telecommunications services for all executive branch agencies, including
telecommunications, telephone maintenance, long distance, Internet, and other
services. The same contractor will develop a unified state voice and data
network for executive branch agencies called AZNET, which will allow agencies
to contact each other directly over the network, reducing local and long-distance
service charges.
Operating budget
While the Department’s operating budget consists of monies appropriated from the
State General Fund, it also receives revenues from other funding sources, including
charges assessed to state agencies for the various services it provides. Table 1 (see
page 5) illustrates the Department’s actual revenues and expenditures for fiscal years
2003 and 2004, and its estimated revenues and expenditures for fiscal year 2005.
The Department received an estimated $126.2 million in revenues in fiscal year 2005,
nearly $17.9 million of which consisted of General Fund appropriations. The
Department also received estimated revenues of approximately $101.3 million in
fiscal year 2005 from state agency charges for the various services that it provides.
The Department’s fiscal year 2005 expenditures were an estimated $106.7 million,
which represented a 10.4 percent decrease from its fiscal year 2004 expenditures of
nearly $119.1 million.
State of Arizona
page 4
Scope and methodology
The Department’s performance was analyzed in accordance with the 12 statutory
sunset factors. The following audits were completed:
􀁺􇩆 Financial Services Division (Auditor General Report No. 05-02).
􀁺􇩉 Information Services Division and Telecommunications Program Office (Auditor
General Report No. 05-11).
Office of the Auditor General
page 5
Table 1: Schedule of Administrative Revenues and Expenditures, in Thousands
Years Ended June 30, 2003, 2004, and 2005
(Unaudited)
2003 2004 2005
(Actual) (Actual) (Estimated)
Revenues:
State General Fund appropriations $ 16,597 $ 17,339 $ 17,885
Charges for services 106,682 108,890 101,343
Other 5,614 6,840 6,949
Total revenue 128,893 133,069 126,177
Expenditures and transfers:
Personal services and employee-related 40,913 42,189 42,360
Professional and outside services 4,479 8,439 7,729
Travel 465 441 429
Other operating1 40,392 48,662 41,257
Equipment and other capital purchases 17,306 18,161 14,141
Allocated costs 683 1,198 744
Total expenditures 104,238 119,090 106,660
Net operating transfers out 1,005 806 1,559
Total expenditures and operating transfers 105,243 119,896 108,219
Excess of revenues over expenditures and operating transfers2 $ 23,650 $ 13,173 $ 17,958
1 Includes various expenditures, such as insurance, telecommunications, printing, data processing, utilities, repair and
maintenance, and rental costs.
2 The Department reports that the excess of revenues over expenditures is primarily attributable to charges for services to
other state agencies in excess of the Department’s costs to provide for the accumulation of reserves for future purchases
of motor pool cars, telecommunications and other capital purchases, and implementation of enhanced 9-1-1 services.
Source: Auditor General staff analysis of financial information provided by the Department of Administration from its
Arizona Financial Information System for the years ended June 30, 2003 and 2004, and department-prepared
estimates for the year ended June 30, 2005. (Actual information was not available at the time of this report.)
􀁺􇩈 Human Resources Division (Auditor General Report No. 05-12).
This report also includes information obtained from department officials and the
Governor’s Regulatory Review Council, as well as from a review of statutes,
administrative rules, department policies and procedures, the 2004-2006 Arizona
Master List of State Government Programs, and the Department’s Web site.
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 Administration for their cooperation and assistance
throughout this audit.
State of Arizona
page 6
In accordance with A.R.S. §41-2954, the Legislature should consider the following 12
factors in determining whether the Arizona Department of Administration
(Department) should be continued or terminated. The three performance audits
identified areas that the Department has operated efficiently and effectively, as well
as opportunities for the Department to improve operations. The evidence assembled
under these 12 factors indicates the continued need for the Department.
1. The objective and purpose in establishing the Department.
The Arizona Department of Administration was established in 1972 by A.R.S.
§41-701. This statute created the Department by merging seven previously
established agencies to provide more centralized support services to state
government. The agencies that were merged included the Departments of
Library and Archives, Public Buildings Maintenance, and Finance; the State
Surplus Property Agency; the Historical Advisory and State Personnel
Commissions; and the Board of History and Archives.1
The Department defines its mission as follows:
“To provide effective and efficient support services to enable government
agencies, state employees, and the public to achieve their goals.”
The Department performs several functions, many of which involve the provision
of different services to state agencies and their employees. These functions and
services include the following:
􀁺􇨠 Accounting—The Department manages accounts receivable and payable,
processes state employee payroll, prepares the State’s annual financial
statements, provides external accounting services to state agencies,
adopts state-wide accounting policies and procedures, operates the state-wide
accounting system (AFIS), and performs internal audits, reviews, and
investigations of state agencies.
1 The Department of Library and Archives, the Historical Advisory Commission, and the Board of History and Archives are
no longer part of the Department. In 1976, the Department of Library and Archives became a legislative agency, and the
Board of History and Archives and the Historical Advisory Commission were placed under the Department of Library and
Archives.
Office of the Auditor General
SUNSET FACTORS
page 7
􀁺􇨠 Procurement—Statute designates the department director as the State’s
central procurement officer, responsible for procuring or supervising the
procurement of all materials, services, and construction that the State
needs. As such, the Department conducts strategic state-wide contracting
for specific goods and services, and procurements for individual agencies
when the value of the procurement exceeds the agency’s delegated
procurement authority or upon request; establishes and administers
procurement policies and procedures for all state agencies; delegates
procurement authority to state agencies; and administers bid protests and
claims appeals.
􀁺􇩆 Facilities management—The Department manages and operates 2,419
state-owned buildings and properties, and provides ongoing custodial,
maintenance, heating and air conditioning, and landscaping services to
these properties. The Department also oversees prison and building
construction; and the acquisition, leasing, planning, and construction of
state facilities.
􀁺􇩈 Human resources—The Department establishes and administers state
personnel rules and policies; administers the State’s self-funded health
benefits program, as well as dental, vision, and life insurance for state
employees, retirees, and their dependents; provides personnel services for
staffing and recruitment, workforce relations, and classification and
compensation; and maintains and administers the State’s Human
Resources Information Solution system.
􀁺􇩉 Information technology—The Department provides information technology
and networking services and support, both within the Department and to
other state agencies.
􀁺􇩒 Risk management and insurance—The Department provides insurance
coverage to state agencies and employees for property and liability losses
through self-insurance and purchased insurance policies; and investigates,
mitigates, and settles all property and liability claims against the State. It
also self-insures and administers the State’s workers’ compensation
benefits program.
􀁺􇩖 Vehicle fleet maintenance—The Department manages the procurement,
assignment, utilization, and maintenance of the State’s 1,767-vehicle fleet.
2. The effectiveness with which the Department has met its objective and purpose
and the efficiency with which it has operated.
The Department is generally effective in meeting its overall objective and
purpose and in operating efficiently. The Department provides centralized
State of Arizona
page 8
programs and services that enable state agencies to share resources and avoid
duplication such as procurement, accounting, travel reduction,
telecommunications, and recruiting and hiring. The audits of the Financial
Services Division, Human Resources Division, and Information Services Division
and Telecommunications Program Office highlighted some ways in which the
Department has operated efficiently:
􀁺􇩔 The Financial Services Division audit (see Auditor General Report No. 05-02,
Finding 2) found that the Department and the state agency procurement
community have designed a new model for state contracting that is
expected to result in cost savings. Under this model, state agencies will
purchase goods and services, such as janitorial supplies or financial
services, collectively benefiting from the price discounts that result from
higher purchase volumes. One state agency will serve as the strategic
contracting center for the procurement of a particular good or service. The
Department began implementing this model in 2005, and has estimated
savings of $29 million to $34 million in fiscal year 2006 in state, federal, and
other funds from using this procurement approach.
􀁺􇩔 The Human Resources Division audit (see Auditor General Report No.05-12,
Other Pertinent Information) found that the Department expects to complete
implementation of a new recruiting and hiring software program in
November 2005, Yahoo!® Hiring Gateway (Hiring Gateway). Hiring
Gateway provides a centralized Web-based process with several features
and benefits that should simplify and expedite recruiting and hiring state-wide.
Hiring Gateway includes a Web site, www.azstatejobs.gov, dedicated
to posting state job announcements and accepting online applications
from interested candidates, and it allows agencies to work online to
develop job announcements, obtain necessary management approvals for
job requisitions, create hiring lists, and send offer letters to prospective
employees.
However, the three audit reports also identified several ways in which the
Department could improve its effectiveness and efficiency. For example:
􀁺􇨠 The Financial Services Division audit found that the Department should
develop a plan for completing the Human Resources Information Solution
(HRIS) system (see Auditor General Report No. 05-02, Finding 1). HRIS will
provide a single integrated system to administer payroll, personnel,
employee benefits, and other related functions. Phase 1 of the system,
which processes state employee payroll, was implemented in December
2003. Phase 2 functions of the system, which were in various stages of
implementation as of April 2005, are expected to provide the major benefits
of the system. These functions include the Hiring Gateway and an
employee/manager self-service component, which would allow a state
employee to input his/her own information, such as an address change,
into the system.
The Department’s new
procurement model is
expected to result in
cost savings.
Office of the Auditor General
page 9
However, the Department did not meet the system’s original and some of
its revised implementation dates and has exhausted most of the project
budget. Specifically:
􀂈􈠠 Implementation time frames missed—The Department and its
contractors expected to implement Phase 1 of the system by April
2003 and Phase 2 by July 2003. Amendments to the contract revised
these dates—Phase 1 was changed to December 2003, and Phase 2
implementation was rescheduled for May 2004. While Phase 1
features were actually implemented in December 2003, as of April
2005, Phase 2 still does not have any components fully implemented.
􀂈􈡐 Project budget mostly exhausted—As of June 30, 2004, the
Department reported that the project had consumed almost all of its
$42.5 million project funding, approximately $6 million of which was
used for project financing.1 The personnel costs for continued HRIS
development and implementation, as well as its operations, are now
funded out of the Human Resources Division’s budget at
approximately $2 million for fiscal year 2005.
According to state agency users, Phase 1 of the HRIS system does not
provide all of the functionality they required or expected. Phase 2, which is
expected to provide the major benefits of the new system, has yet to be fully
implemented. As a result, agencies have not realized anticipated efficiency
savings from HRIS. The Department should develop a plan for completing
the system, specifying the remaining functions to be implemented, the staff
resources needed, and a timeline to fully implement the system.
Additionally, the audit found that the Department can improve its workers’
compensation claims process to help ensure that state employees who are
injured while at work promptly receive benefits (see Auditor General Report
No. 05-02, Finding 3). Although Risk Management meets the statutory time
frame of 21 days for processing a claim, it may take much longer—weeks
or even months—after the injury occurs for the injured employee to know
whether a claim has been approved or denied. According to statute, injured
state employees are responsible for filing a claim with the Industrial
Commission of Arizona (Commission). Risk Management does not have to
begin processing a claim until it is filed with the Commission. However,
state employees may be unaware of the requirement, or some may rely on
their physician to file an injury report with the Commission. Risk
Management can prevent unnecessary workers’ compensation benefit
delays by improving communication with injured employees. Although Risk
Management has established an automated phone system and Web site
to facilitate the reporting of work-related injuries to state employees, neither
the phone system nor Web site adequately explains how to proceed with a
The Department needs
a plan for completing
HRIS.
1 According to the Department, approximately $2.3 million remains to pay for a planned upgrade to the system in fiscal
year 2006 or 2007.
State of Arizona
page 10
claim or the need to report claims to the Industrial Commission of Arizona.
Adding this information could help injured employees receive benefits
sooner.
􀁺􇨠 The Information Services Division and Telecommunications Program Office
audit found that the Department does not perform regular monitoring and
testing of its internal network and data center to identify and resolve these
systems’ potential vulnerabilities (see Auditor General Report No. 05-11,
Finding 1). Additionally, the Department has not performed risk
assessments to identify and evaluate the risks to the security of its
information resources; developed comprehensive security policies and
procedures; ensured corrective actions are implemented to address
identified security weaknesses; and provided annual security awareness
training to department employees.
The Division should establish a centralized and comprehensive security
program to address these deficiencies and assign one of its positions the
responsibility for administering the program. The Division should also
determine if it needs additional staff, funding, and technical resources to
adequately perform these security duties. If additional staff and resources
are needed, the Department should then assess whether it could reassign
existing staff and resources or take other steps, as appropriate, to seek
additional staff and resources.
Additionally, the Department should seek statutory authority to enforce
security requirements that state agencies must follow to use AZNET, the
State’s privatized telecommunications network, which is currently under
development. The Department lacks the statutory authority to enforce
security standards for information systems shared by state agencies. While
the Government Information Technology Agency (GITA) has statutory
authority to issue state-wide security standards, it lacks authority to enforce
its standards, and its functions do not include the daily oversight of AZNET.
However, if one state agency does not sufficiently secure its resources, it
potentially exposes the other state agencies using a shared resource, such
as AZNET, to an increased risk of data loss or hacker intrusion. With
statutory authority, the Department can ensure that agencies using AZNET
meet security standards, as defined by GITA, and any additional specific
standards that the Department works with GITA to define.
Finally, the Department should improve its oversight of activities related to
consolidating telecommunications support services and developing a
single, privatized telecommunications network (see Auditor General Report
No. 05-11, Finding 2). The Department needs to ensure there is an accurate
inventory of the existing telecommunications equipment to determine each
agency’s telecommunications equipment needs and costs under the
Office of the Auditor General
page 11
contract, and to also identify costs for equipment upgrades. For example,
the inventory will determine which of seven categories each of the State’s
approximately 40,000 phones falls under; the associated service costs for
these phones can vary as much as $40 per month, per phone. However,
while a department official has indicated that two staff will be available to
assist agencies, the Department has not dedicated any resources to
oversee this process and instead plans to rely on state agencies’ staff and
the contractor to develop the inventory. To ensure an accurate inventory is
conducted, the Department should reassign staff to oversee the inventory
process or, if necessary, reallocate existing funding or take other steps, as
appropriate, to hire a private contractor to oversee this process.
􀁺􇩔 The Human Resources Division audit found that the Department needs to
re-examine several aspects of its management of the State’s self-funded
health benefits program (program), including determining what activities
are most appropriate for its consultant to undertake (see Auditor General
Report No. 05-12, Finding 1). To implement the program in the 4 months it
had available, the Department relied heavily on help from a consultant. This
short time frame also led to a larger-than-expected role for the consultant in
overseeing the program. This heavy reliance on the consultant has required
a significant amount of its fiscal year 2005 program administration budget
and affected the Department’s ability to hire staff and develop the
necessary expertise to manage the program. However, now that the
program is operational, the Department should determine the activities its
consultants should perform and adopt a written policy that contains
guidelines for their use.
The Department also should take steps to improve its oversight of its
healthcare vendors by requiring the vendors to achieve additional
standards for performance measures, developing quality-of-care
performance measures, and developing a plan for conducting operational
and financial reviews of its vendors. Finally, the Department also needs to
assess its own staffing needs for overseeing the program. The Department
has begun to develop a staffing plan for fiscal years 2007 and 2008 and
should ensure that it includes the positions it needs, their duties, and an
analysis of appropriate personnel costs.
Further, the Department should take some additional steps to enhance the
long-term financial stability of the self-funded health benefits program by
improving controls over healthcare claims payments (see Auditor General
Report No. 05-12, Finding 2). The Department has contracted with four
vendors to process and pay medical and prescription drug claims, and
they have processed over $262.9 million in claims payments between
State of Arizona
page 12
The Department should
take additional steps to
enhance the long-term
financial stability of the
self-funded health
benefits program.
October 1, 2004 and June 30, 2005. Independent annual audits of vendors’
claims payment processes and controls, and claims payment data, as well
as department tests to verify the accuracy of claims payments, would help
ensure that the vendors are appropriately and accurately processing
medical claims.
3. The extent to which the Department has operated within the public interest.
Although the Department’s operations primarily affect state agencies and
employees, some areas, such as personnel administration, public building
maintenance, risk management, and procurement can indirectly impact the
general public. For example:
􀁺􇩔 The Financial Services Division audit (see Auditor General Report No. 05-02)
found that Risk Management changed its allocation model to encourage
loss control behavior among state agencies. The previous model used by
Risk Management to allocate insurance charges to state agencies did not
provide financial incentives to encourage loss control behaviors. However,
the new model is driven by an agency’s historical loss trends and its
exposure as it relates to a specific line of insurance coverage.
􀁺􇩔 The Human Resources Division audit (see Auditor General Report No. 05-12,
Finding 2) found that the Department has established a funding reserve of
approximately $49.6 million as of June 30, 2005, to help lessen the State’s
risk for self-funding healthcare benefits. The Department has also
purchased an insurance policy to limit the financial responsibility the State
faces due to claims that exceed $500,000 per insured individual. One
concern associated with self-funded health insurance programs is the risk
of catastrophic claims and the potential liability of paying for these claims.
Insurance against such large claims reduces the financial risk of self-funding
employee health benefits.
􀁺􇨠 The Department has implemented an employee wellness program, which
includes health education, screenings, and an employee assistance
program to improve state employees’ health and well-being. Health
education takes place through worksite classes on topics such as Blood
Pressure Management and Weight Watchers® at Work. Worksite
screenings include skin cancer and osteoporosis screenings. The
Employee Assistance Program provides confidential, short-term
counseling services and resource referrals to state employees and eligible
family members.
Office of the Auditor General
page 13
4. The extent to which rules adopted by the Department are consistent with the
legislative mandate.
Based on auditor review of applicable statute and corresponding administrative
rules, as well as reviews performed by staff of the Governor’s Regulatory Review
Council (GRRC), the Department has adopted rules that, for the most part,
appear consistent with the legislative mandate. While GRRC identified areas
where the Department had not promulgated rules, it appears that the
Department had addressed these requirements in a different manner. For
example, GRRC noted that the Department has not adopted rules concerning
state accounting requirements and procedures. However, the Department has
instead adopted a Statewide Accounting Manual, which prescribes the
accounting policies and procedures that state agencies must follow. According
to A.R.S. §41-1005(A)(4), agencies are exempt from adopting rules if the rule
concerns only the internal management of an agency that does not directly and
substantially affect the procedural or substantive rights or duties of any segment
of the public. Since the State’s accounting policies and procedures do not affect
the procedural or substantive rights or duties of the public, a rule is not required.
Additionally, the Department is revising and updating the State Procurement
Code, A.A.C. R2-7-101 et seq. The proposed changes include modifications to
Article 2, which provides specific guidance for the director to follow in hiring a
state procurement administrator and lists duties of a state procurement
administrator; Article 4, which details the manner in which specifications are
prepared; and Article 10, which revises the process for approving specific
materials and/or services for mandatory use. The Department estimates that a
final rule package will be submitted to the Governor’s Regulatory Rule Council
for approval in early 2006.
5. The extent to which the Department has encouraged input from the public
before adopting its rules and the extent to which it has informed the public as to
its actions and their expected impact on the public.
The Department has encouraged input from stakeholders, other state agencies,
and the public before adopting its rules. Specifically, for two of its most
significant recent rule-making efforts, the Department reports using a variety of
tools to solicit input from the public. For example, for its revision of the State
Procurement Code, the Department established several specialized focus
groups of minority- and women-run businesses, business associations,
construction contractors and engineers, and technology firms to obtain
feedback on proposed changes to the code. The Department met with each
group, presented them with the proposed changes, and solicited comments.
The Department also met with state agencies and political subdivisions to obtain
comments. A committee consisting of procurement managers from several
State of Arizona
page 14
state agencies used the feedback from the focus groups, state agencies, and
political subdivisions and drafted proposed legislation and a rewrite of the rules.
The draft rules were shared with state agencies and the focus group
participants, and were posted on the Department’s Web site to obtain further
comments.
6. The extent to which the Department has been able to investigate and resolve
complaints that are within its jurisdiction.
Statutes provide the Department with authority to address complaints within the
following areas:
􀁺􇩐 Procurement—The Department has the authority to resolve bid protests
according to A.R.S. §41-2501 et seq. Under this authority, the Department
has adopted administrative rules that provide guidance for filing a protest,
issuing a written decision, and appealing the decision. In remedying a
protest, the Department can decline to exercise an option to renew under
the contract, terminate the contract, amend the solicitation, issue a new
solicitation, award a contract consistent with procurement statutes and
regulations, or provide other relief as deemed necessary to ensure
compliance with procurement statutes and regulations. According to a
department official, the Department receives about 80 bid protests
annually.
􀁺􇩐 Personnel—The Department also has the authority to resolve certain
personnel-related issues according to A.R.S. §41-761 et seq. Under this
authority, the Department has adopted administrative rules that provide
guidance related to personnel matters and processes, such as making pay
adjustments due to a manifest error, which is an act or failure to act that is,
or clearly has caused, a mistake; resolving complaints about procedures
used in the identification or selection of job candidates; and reviewing the
classification of a position and grievances filed by employees. During 2004,
the Human Resources Division received 34 personnel-related complaints
that were filed through a formal process based on statutory authority.
In addition, some department divisions also handle and resolve complaints. For
example:
􀁺􇩔 The Department’s Enterprise Procurement Services (EPS) receives
complaints from state agencies regarding vendor performance. One way in
which EPS receives these complaints is via vendor performance reports,
which are available on its Web site. While the Department has a written
complaint procedure, it lacks detail guiding the procurement specialist
through the process or the actions a specialist can take to resolve the
Office of the Auditor General
page 15
complaint. In addition, the Department could not report on the number of
vendor performance reports it receives, as it does not log these reports
when they are received or track staff progress in investigating and resolving
the complaint. Therefore, the Department should specify the steps a
procurement specialist should take to investigate a complaint, as well as
the criteria and factors that should be considered when determining an
appropriate action to resolve the complaint. The Department should also
create a log to record the receipt of vendor performance reports and to
assist in tracking the progress of the complaint investigation.
􀁺􇩔 The Department helps to resolve employee appeals of department
enrollment decisions and/or vendor medical service decisions regarding
the State’s self-funded health benefits program (see Auditor General Report
No. 05-12, Finding 1). Between October 2004 and June 2005, the
Department had received 350 appeals. The most common type of appeals
involve the denial of a medical service, and of the 350 appeals received,
296 had been closed with the Department’s help. A number of these
appeals were resolved on the same day they were received, while only two
appeals took more than 100 days to close.
However, the Department has not established written policies and
procedures for its process. Therefore, the Department should establish
policies and procedures documenting its appeals-handling process.
7. The extent to which the Attorney General or any other applicable agency of state
government has authority to prosecute actions under the enabling statutes.
A.R.S. §41-192 authorizes the Attorney General’s Office to serve as the legal
advisor to the Department. For example, the Department handles reported
liability claims internally and with the approval of the Attorney General. The
Department approves settlements of reported liability claims up to $100,000,
and approves settlements in conjunction with the Attorney General for claims
from $100,000 to $250,000.1 The Attorney General’s Office also provides legal
services for the recovery of funds expended by the Department for losses for
which other parties may be legally responsible.
In addition, the Attorney General’s Office is the legal advisor for reported rule
violations, such as reports of collusion or other anticompetitive practices that are
suspected among bidders or offerors within the procurement process.
State of Arizona
page 16
1 Settlements in excess of $250,000 are subject to Joint Legislative Budget Committee approval.
The Department should
specify steps for
investigating a vendor
performance complaint.
8. The extent to which the Department has addressed the deficiencies in its
enabling statutes that prevent it from fulfilling its statutory mandate.
Several pieces of legislation affecting the Department’s programs were enacted
in the 2004 and 2005 regular legislative sessions:
􀁺􇩌 Laws 2004, Chapter 190—Amends the state procurement code, changing
language regarding competitive sealed proposals to allow offerors to
submit revisions to their offers if the original offer is determined by the
procurement officer to be in the competitive range. This legislation also
increases the threshold for competitive bids and proposals and allows the
State to pay for a demonstration project if deemed in its best interest.
􀁺􇩌 Laws 2004, Chapter 335—Allows the Department to self-insure, or self-fund
health insurance, and contract directly with provider organizations. The
legislation requires the Department to designate and adopt performance
standards for cost competitiveness, utilization review issues, network
development and access, conversion and implementation, report
timeliness, quality outcomes, and customer satisfaction.
􀁺􇩌 Laws 2005, Chapter 162—Amends the state procurement code, adding a
section to allow the State to procure construction-manager-at-risk
construction services and job-order-contracting construction services.1 The
legislation stipulates the process by which these contracts shall be
procured, and states that a contract for construction services using the job-order-
contracting method may be entered into for a period of up to 5 years.
􀁺􇩌 Laws 2005, Chapter 301—Requires the department director to establish a
Telecommunications Program Office and enter into a contract with a
business to provide for the installation and maintenance of
telecommunications systems and act as the State’s agent for
telecommunications carrier services to the State’s offices, departments,
and agencies.
9. The extent to which changes are necessary in the laws of the Department to
adequately comply with the factors in the sunset laws.
Based on audit work, the Department should ask the Legislature to amend §41-
712 to grant the Department the authority to enforce the security requirements
that state agencies must follow related to AZNET. While GITA was given statutory
authority to issue state-wide security standards, it lacks authority to enforce
these standards, and its functions do not include the daily oversight of AZNET.
With this authority, the Department can ensure that agencies using AZNET meet
1 Construction-manager-at-risk refers to a project delivery method in which there is a contract for construction services that
is separate from the contract for design services. A job-order contract refers to a project delivery method in which the
contract is for indefinite quantities of construction and, at the Department’s election, may or may not include a guaranteed
minimum amount of work.
Office of the Auditor General
page 17
security standards as defined by GITA and any additional specific standards the
Department works with GITA to define (see Auditor General Report No. 05-11,
Finding 1).
10. The extent to which the termination of the Department would significantly harm
the public’s health, safety, or welfare.
Terminating the Department could harm state employees’ and, indirectly, the
public’s health, safety, and welfare due to the disruption of the many centralized
services the Department provides. For example, state employees and vendors
would not be paid, many of the State’s buildings and grounds would not be
cleaned or maintained, and the State would be without property, liability, and
workers’ compensation insurance. Further, while many of the Department’s
functions could be performed separately by each agency, it may not be efficient
or cost-effective to operate in that manner.
11. The extent to which the level of regulation exercised by the Department is
appropriate and whether less or more stringent levels of regulation would be
appropriate.
Because the Department is not a regulatory agency, this factor is not applicable.
12. The extent to which the Department has used private contractors in the
performance of its duties and how effective use of private contractors could be
accomplished.
The Department uses private contractors to help it accomplish some of its
duties. Specifically, the Department reported using private contractors for
functions related to software development, disaster recovery, and custodial
services. In addition, the Department has used private contractors for the
following programs:
􀁺􇩈 Human Resources Information Solution (HRIS)—The Department hired a
private contractor to help develop and implement this new system. HRIS
replaced the State’s Human Resources Management System, Benefits
Information Tracking System, and other applications with a single
integrated system to administer payroll, personnel, and employee benefits.
􀁺􇩔 Telecommunications Program Office—In January 2005, the Department
signed a contract to consolidate management of all executive branch
telecommunications services under a single contractor and to create a
State of Arizona
page 18
state-wide voice and data network called AZNET used by executive branch
agencies.
􀁺􇩒 Risk Management—The Department receives assistance from private
contractors for actuarial services and to provide workers’ compensation
benefits to employees.
􀁺􇩇 General Services Division—The Department enters contracts with
architects and engineers to design facilities and then hires construction
companies to build the facilities. For example, in 2005 the Department
awarded contracts to design and construct suicide prevention
modifications to the Adobe Mountain Juvenile Institution in Phoenix; in 2004
to design and build three prison facilities housing 1,000 beds in Perryville,
Tucson, and Douglas; and in 2002-2003 to design and build a National
Guard Civil Support Team Ready Building in Phoenix.
􀁺􇩍 Motor Pool—The Department contracts with private vendors to provide
passenger vehicle rentals and compressed natural gas capabilities at the
Department’s alternative fuels station. The Department uses a private rental
car contractor to provide vehicles for business travel for state employees
who work outside of Phoenix, and as a resource to obtain vehicles for
business travel for employees in Phoenix if the Department’s fleet does not
have the needed vehicles available. The Department also contracted with a
private vendor to design, construct, operate, and maintain a compressed
natural gas vehicle fueling station at the Department’s alternative fuel
station located near the state capitol building in Phoenix.
Further, the Department contracts with health insurance providers and
administrators to provide self-funded health insurance benefits to state
employees, retirees, and their dependents, and a consultant to perform a variety
of activities to manage and oversee the State’s benefits program. To better
manage the program, the Department should more clearly define the role of its
consultant and increase its oversight of the consultant’s activities. Please see
Finding 1 of the Human Resources Division Audit (Auditor General Report No.
05-12) for further information on the recommendations pertaining to contractors’
roles in the State’s self-funded health benefits program.
Audit work did not identify other uses for private contractors by the Department.
Office of the Auditor General
page 19
State of Arizona
page 20
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
Janet Napolitano
Governor
Jerry A. Oliver, Sr.
Interim Director
ARIZONA DEPARTMENT OF ADMINISTRATION
OFFICE OF THE DIRECTOR
100 North 15th Avenue • ROOM 401
PHOENIX, ARIZONA 85007
(602) 542-1500
September 21, 2005
Debbie Davenport
Auditor General
2910 North 44th Street, Suite 410
Phoenix, Arizona 85018
Dear Ms. Davenport:
On behalf of the entire department, I wish to thank you for you staff’s hard work and dedication
during the sunset audit of the Department of Administration. These audits were an excellent
opportunity for this department to receive objective, in-depth scrutiny of our performance.
Your extensive efforts will yield valuable improvements in our operations as we implement your
recommendations.
Sincerely,
Jerry A. Oliver
Interim Director
ADOA Agency Response, by Section and Finding
Sunset Factor #6: The extent to which the Department has been able to investigate and
resolve complaints that are within its jurisdiction.
Recommendations:
Recommendation – EPS (page 16): The Department should specify the steps a procurement
specialist should take to investigate a complaint, as well as the criteria and factors that should
be considered when determining an appropriate action to resolve the complaint.
Agency Response: The finding of the Auditor General is agreed to and the audit
recommendation will be implemented.
Recommendation – EPS (page 16): The Department should also create a log to record the
receipt of vendor performance reports and to assist in tracking the progress of the complaint
investigation.
Agency Response: The finding of the Auditor General is agreed to and the audit
recommendation will be implemented.
04-L1 Letter Report—Arizona Medical
Board
04-L2 Letter Report—Gila County
Transportation Excise Tax
04-L3 Letter Report—Department of
Economic Security—Population
Estimates
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
04-09 Arizona Department of
Transportation, Motor Vehicle
Division— State Revenue
Collection Functions
04-10 Arizona Department of
Transportation, Motor Vehicle
Division—Information Security
and E-government Services
04-11 Arizona Department of
Transportation, Motor Vehicle
Division—Sunset Factors
04-12 Board of Examiners of Nursing
Care Institution Administrators
and Assisted Living Facility
Managers
05-L1 Letter Report—Department
of Health Services—
Ultrasound Reviews
05-01 Department of Economic
Security—Division of
Employment and
Rehabilitation Services—
Unemployment Insurance
Program
05-02 Department of Administration—
Financial Services Division
05-03 Government Information
Technology Agency (GITA) &
Information Technology
Authorization Committee (ITAC)
05-04 Department of Economic
Security—Information Security
05-05 Department of Economic
Security—Service Integration
Initiative
05-06 Department of Revenue—Audit
Division
05-07 Department of Economic
Security—Division of
Developmental Disabilities
05-08 Department of Economic
Security—Sunset Factors
05-09 Arizona State Retirement
System
05-10 Foster Care Review Board
05-11 Department of Administration—
Information Services Division
and Telecommunications
Program Office
05-12 Department of Administration—
Human Resources Division
Performance Audit Division reports issued within the last 24 months
Future Performance Audit Division reports
Department of Revenue—Collections Division
Department of Revenue—Business Reengineering Integrated Tax System (BRITS)