State of Arizona single audit reporting package year ended June 30, ...

              2008
Year Ended June 30, 2008
State of Arizona
REPORT
HIGHLIGHTS
FINANCIAL AND SINGLE AUDITS
General Fund Financial
Condition Declines
Subject
The State of Arizona issues a
Comprehensive Annual Financial
Report. The State is responsible
for preparing financial
statements, maintaining strong
internal controls, demonstrating
accountability for its use of
public monies, and complying
with federal program
requirements. As the auditors,
our job is to determine whether
the State has met its
responsibilities.
Our Conclusion
The information in the State’s
financial statements is fairly stated
in all material respects and the
financial statements can be relied
on. However, auditors identified
36 deficiencies in internal control
over financial reporting, including
10 material weaknesses. In
addition, the State maintained
adequate internal controls over,
and complied with, the federal
compliance requirements for 2 of
the 29 federal programs tested.
However, for 27 federal programs
tested, auditors found that the
State did not maintain adequate
internal controls or comply with
one or more of the compliance
requirements. See pages 3 and 4
for further information.
During fiscal year 2008, General Fund
revenues and other financing sources
totaled approximately $20 billion, and
expenditures and other financing uses
totaled approximately $21.6 billion.
Revenues and other financing sources
increased $436 million from fiscal year
2007, but the increase was not large
enough to offset the $1.7 billion increase
in expenditures and other financing uses.
As a result, the fund balance of the
State’s General Fund declined $1.6
billion from the prior fiscal year. This
represents a decrease of approximately
81 percent.
General Fund revenues and other
financing sources increased $436
million, or 2.2 percent, between fiscal
years 2007 and 2008, primarily as a
result of the following:
• Intergovernmental revenues increased
$999 million, or 12.7 percent, because
of an increase in monies received for
health and welfare programs from the
federal and local governments.
• Sales tax revenues decreased $217
million, or 3.8 percent because of the
economic downturn. Sales taxes paid
by retail stores and construction
contractors decreased by $120 million
and $112 million, respectively, when
compared to fiscal year 2007 sales tax
receipts. Overall, collections in other
sales tax categories increased slightly.
• Income tax revenues decreased $454
million, or 9.8 percent. This decrease
was due to a gradual reduction in the
individual income tax rates, a new
formula used to compute the tax
liability for multi-state corporations and
a decline in Arizona’s economy.
General Fund expenditures and other
financing uses increased $1.7 billion, or
8.3 percent, between fiscal years 2007
and 2008, primarily as a result of the
following:
• Education expenditures increased
$310 million, or 5.9 percent,
compared to fiscal year 2007. The
increase can be primarily attributed to
additional state assistance for
kindergarten through 12th grade
operating expenditures to support a
student enrollment increase of 26,756
and a 2 percent inflation adjustment.
Furthermore, the fiscal year 2008
budget provided for an additional $80
million in a new Kindergarten “Group
B” Weight funding for the second year
of a 2-year phase-in. Additionally,
programs supported by federal grant
monies increased approximately $27
million during the fiscal year.
• Health and welfare expenditures
increased $1.2 billion, or 13.1 percent,
because of increased enrollment in
the Arizona Health Care Cost
Containment System’s (AHCCCS)
programs and associated provider
reimbursement increases. Overall
program enrollment in the various
AHCCCS programs increased 5.1
percent, primarily because of growth
in the Social Security Act Title XIX
Waiver Group childless adults, Title
XIX families and children, and long-term
care program populations. Also,
capitation rates were increased by a
weighted average of 6.7 percent for
the contract period of October 2007 to
September 2008.
page2
The graph to the right shows the General
Fund’s fund balance had increased from
2004 through 2006 by approximately $1.5
billion. However, the fund balance has
decreased the past 2 years by $1.9 billion,
ending with an unreserved fund balance of
$109 million and a reserved fund balance
of $253 million. Included in the $253 million
reserved fund balance is $147 million for
the Budget Stabilization Fund. The Budget
Stabilization Fund is a form of “Rainy Day
Fund” the Legislature established in 1991.
$747
$1,310
$2,266
$1,923
$362
$14
$161
$651 $674
$147
$0
$300
$600
$900
$1,200
$1,500
$1,800
$2,100
$2,400
2004 2005 2006 2007 2008
(In Millions)
General Fund Balance
Past 5 Fiscal Years
Total Fund Balance Budget Stabilization Fund
Expenditures of Federal Monies
Increased by $873 Million
During fiscal year 2008, the State spent $10.6
billion of federal monies. As shown in the chart
to the right, six entities administered 96 percent
of these monies.
Overall, expenditures increased $873 million, or
9 percent, from the $9.7 billion expended in
fiscal year 2007. The largest increase occurred
in the Unemployment Insurance program and
the Medicaid, Child Nutrition, Food Stamp, and
Highway Planning and Construction Clusters.
Combined expenditures for these programs
increased by $856 million. This increase was
attributable to inflationary increases in
healthcare costs, enrollment increases in
healthcare and child nutrition programs,
accelerated highway construction, and
increases in unemployment payments because
of the economic downturn. The largest
increase, $452 million, occurred in federal
monies expended for the Medicaid Cluster by
the AHCCCS. As shown in the graph to the
right, expenditures of federal monies have
increased $1.2 billion between fiscal years 2006
and 2008. Expenditures for the Unemployment
Insurance program and the Medicaid, Child
Nutrition, Food Stamp, and Highway Planning
and Construction Clusters accounted for all but
$63 million of the increase.
Health Services
$377 Other Agencies
$414
Transportation
$574
Education
$930
Universities
$1,048
Economic
Security
$2,052
AHCCCS
$5,210
State Agencies that Administer Federal Awards
(In Millions)
$9,367
$9,732
$10,605
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000
2006 2007 2008
(In Millions)
Federal Programs Expenditures
Fiscal Years 2006-2008
page3
The State Did Not Always Comply
with Federal Program Requirements
Auditors identified and tested 29 federal
programs, including 11 program clusters, under
the guidelines established by the Single Audit
Act. Audit tests included evaluating the State’s
compliance with each program’s federal
regulations generally related to expending,
monitoring, matching, and reporting federal
awards. Auditors noted internal control
weaknesses or instances of noncompliance
with program requirements for 27 of the
programs tested. For 11 of the 27, the internal
control weaknesses and instances of
noncompliance with program requirements
were considered to be material. As a result, our
audit opinion on federal compliance was
modified because of noncompliance with
federal requirements for the following programs
or clusters: Food Stamp Cluster, Child Nutrition
Cluster, Cooperative Forestry Assistance, WIA
Cluster, Education and Human Resources,
Migrant Education—State Grant Program,
Rehabilitation Services—Vocational
Rehabilitation Grants to States, Temporary
Assistance for Needy Families, Child Support
Enforcement, Homeland Security Cluster, and
Research and Development Cluster.
The Department of Economic Security Did
Not Materially Comply with Program
Requirements for Five Programs
The Arizona Department of Economic Security
receives federal monies to help administer
assistance programs to recipients throughout the
State of Arizona. For the period July 1, 2007
through June 30, 2008, the Department received
almost $2.1 billion in federal financial assistance.
However, for the audit period, the Department did
not materially comply with federal requirements for
five of its programs. Our report indicates that the
following programs had material internal control
weaknesses and material instances of
noncompliance with federal requirements.
• The Division of Benefits and Medical Eligibility,
Family Assistance Administration offices did not
materially comply with federal requirements
applicable to the Food Stamp Cluster and the
Temporary Assistance for Needy Families
(TANF) program, since they did not always
follow the internal control policies and
procedures for activating and issuing electronic
benefits transfer (EBT) cards. In addition, three
employees manipulated the eligibility computer
system to issue EBT cards for personal use.
This resulted in unallowable costs of $265 in
food stamp benefits and $10,010 in TANF
support service payments. The Department
referred these matters to the Office of the
Attorney General for further investigation and
prosecution.
• The Division of Benefits and Medical Eligibility,
Family Assistance Administration offices did
not materially comply with federal
requirements applicable to the TANF program,
since they did not always retain documents
supporting the verification of wage and
unemployment compensation through the
data exchange process or document the
effect of its verification on eligibility and benefit
determinations from its review.
• The Division of Employment and Rehabilitation
Services, Rehabilitation Services
Administration did not materially comply with
federal requirements for the Rehabilitation
Services—Vocational Rehabilitation Grants to
States program because it did not always
determine if applicants were eligible within the
specified time period.
• The Division of Child Support Enforcement did
not materially comply with federal
requirements applicable to the Child Support
Enforcement program for establishing support
obligations, enforcing medical support
obligations and interstate services, and
establishing new cases.
• The Division of Employment and Rehabilitation
Services did not materially comply with federal
reporting and monitoring requirements for the
WIA Cluster.
State of Arizona
REPORT
HIGHLIGHTS
FINANCIAL AND SINGLE AUDITS
Year Ended June 30, 2008
A copy of the full report
can be obtained by calling
(602) 553-0333
or by visiting
our Web site at:
www.azauditor.gov
Contact person for
this report:
Rick Meyer
TO OBTAIN
MORE INFORMATION
page 4
Ten Material Weaknesses Were
Identified in Internal Control
over Financial Reporting
• Arizona State University did not have
adequate controls over payroll
expenses and its new human
resources and payroll computer
system.
• Arizona State University did not have
effective access, program change,
and disaster recovery controls for its
financial accounting system. It also
did not have effective security,
access, and change management
controls for its new student
information and human resources
and payroll computer systems.
• Northern Arizona University did not
have adequate controls over access
and application software changes for
its computer systems.
Auditors identified 36 deficiencies in
internal control over financial reporting.
Ten of these deficiencies were material
weaknesses. A material weakness is a
weakness in internal controls that could
lead to a material misstatement of the
State’s financial statements. The more
significant material weaknesses were
as follows:
• The Department of Administration’s
Director lacked the authority to
enforce rules over financial reporting.
• The Department of Economic
Security’s Division of Developmental
Disabilities did not ensure its
financial statements were accurate
and did not follow the AHCCCS-approved
method to estimate its
accrued long-term care costs.
Single Audit Fact Sheet
 Thirty-six weaknesses in financial reporting internal controls, including 10
material weaknesses.
 Thirty-one findings identifying weaknesses in federal compliance internal
controls, including 17 material weaknesses.
 Thirty-one findings identifying violations of federal program compliance
requirements, including 14 material violations.
 Program costs totaling $634,123 were questioned as a result of our audit.