Performance audit, Department of Environmental Quality management functions

              PERFORMANCE AUDIT
DEPARTMENT OF ENVIRONMENTAL QUALITY
Management Functions
Report to the Arizona Legislature
By the Auditor General
August 1993
93- 4
.
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPYTvnYDlTOlC. ENEnAL
August 23, 1993
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Edward Z. Fox, Director
Arizona Department of Environmental Quality
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Arizona Department of Environmental Quality management functions. This report is in
response to a September 13, 1992 resolution of the Joint Legislative Oversight
Committee. This performance audit was conducted as part of the Sunset Review set
forth in Arizona Revised Statutes § § 41- 2951 through 41 - 2957
This is the first in a series of reports to be issued on the Arizona Department of
Environmental Quality. The report addresses several Department- wide management
issues. These agency- wide issues are significant because the lack of adequate
management in key areas can affect many programs simultaneously. In one area,
recovering program costs allowed by law, we found that the Department lacks
procedures needed to ensure effective cost recovery and has lost over $ 1 million
annually. We also found that the Department did not comply with Arizona procurement
requirements for several major purchases. In addition, key aspects of the Department's
collections and electronic data processing functions are inconsistent with generally
accepted practices in those areas.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 24, 1993.
Sincerelv.
2 9 1 0 NORTH 44TH STREET I SUITE 4 1 0 I PHOENIX, ARIZONA 8 5 0 1 8 ( 602) 553- 0333 FAX ( 602) 553- 0051
SUMMARY
The Ofice of the Auditor General has conducted a performance audit of the Arizona
Department of Environmental Quality ( ADEQ) management functions pursuant to
a September 30, 1992 resolution of the Joint Legislative Oversight Committee. The
audit was conducted as part of the Sunset Review set forth in Arizona Revised
Statutes 8841- 2951 through 41- 2957.
This audit was conducted to address Department functions that are essential to
effective, eficient operation but which would not be fully addressed by audits of
specific programs. With this in mind, we targeted cost- recovery, revenue collection,
contract management, and EDP services for review. In each case, responsibility for
managing these activities is not assigned to a single organizational unit, but is
dispersed throughout ADEQ.
ADEQ Has Been Slow To
Implement Cost- Recovery
Program ( see pages 5 through 9)
The Department has only recently accelerated efforts to recover program costs
allowed by statute. Weak efforts in past years have cost the Department over $ 1
million in annual revenue, and shifts the burden of regulatory costs from responsible
parties to the taxpayers. ADEQ's lack of success in recovering monies owed is largely
due to the Agency's past failure in making cost recovery a Department priority.
Although the Agency's current administration has shown greater interest in cost
recovery, any serious attempt to improve ADEQ's cost- recovery effort will also require
the development of policies and procedures to provide greater coordination and
consistency to what has been a fragmented, ineffective program.
ADEQ Can Collect An Additional $ 396,000
Annuallv In Fees ( see pages 11 through 13)
In addition to revenues lost due to a weak cost- recovery effort, we also identified
$ 396,000 in uncollected fees owed to ADEQ in 1992. This is due to the Department's
failure to institute common collection practices such as second billings, penalties for
late payment, and the use of a collection agency when necessary.
Other revenues may be lost because the Department does little to verify that correct
payments are made by regulated facilities. Many fees are based on information
provided by the regulated community, such as the amount of disposed waste or
discharged effluent. However, ADEQ lacks the audit capability to review records to
ensure that correct fees are paid. We found evidence of underpayment-- a limited
review ( 28 of 2,400 accounts) identified 12 cases with estimated underpayments
totalling $ 65,000.
Contract Management
At ADEQ Is Poor ( see pages 15 through 19)
ADEQ's failure to manage Agency contracts in accordance with accepted standards
has been costly. We documented instances in which questionable contractor payments
were made due to the Department's poor contract management. In one case a poorly
conceived contract led to excessive payments of $ 1 million. Because of the large dollar
amounts involved, it is imperative that ADEQ take action to strengthen its contract
management function. Basic, but critical steps, such as developing policies and
procedures and training all relevant personnel to follow accepted practices, need to
be quickly initiated. Further, the Department should also establish a greater role for
its Contracts and Procurement section to ensure a more coordinated contracting
effort.
While ADEQ makes these changes, the State Procurement Ofice ( SPO) should assist
the Department by providing the training and oversight necessary to ensure effective
implementation. Moreover, SPO should closely monitor all contracts over $ 25,000 to
ensure that the Department protects the State's interest in dealing with contractors.
If ADEQ contracts continue to jeopardize the State's interest, SPO should rescind or
curtail the Department's authority to manage its own contracts.
ADEQ's EDP Function Needs
More Effective Manaclement ( see pages 21 through 26)
ADEQ is unable to effectively utilize its electronic data processing ( EDP) technology
because of poor management. For example, although the Department invested nearly
$ 1.8 million to create an extensive data communications network, much of this
capability remains underutilized. Our review found that information continues to be
gathered, maintained, and used in separate, unconnected databases.
Such problems are due to a lack of coordinated executive- level involvement in
managing the Agency's EDP function. To correct this problem, ADEQ needs to create
an EDP steering committee composed of executive- level staff, senior program
managers, and key EDP personnel. The committee needs to develop a strategic plan
t o guide EDP development, develop policies and procedures, define EDP
responsibilities, and establish a budget for meeting Agency- wide EDP objectives.
TABLE OF CONTENTS
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . .
FINDING I: ADEQ HAS BEEN SLOW
TO IMPLEMENT COST- RECOVERY PROGRAMS . . . . . . . . . . . .
Cost Recovery Is An Important
Environmental Management Tool . . . . . . . . . . . . . . . . . . . . . . . .
Weak Recovery Effort Has Cost
ADEQ Over $ 1 Million Annually . . . . . . . . . . . . . . . . . . . . . . . . .
Cost Recovery Has Not Been
A Departmental Priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINDING II: ADEQ CAN COLLECT AN
ADDITIONAL $ 396,000 ANNUALLY IN FEES . . . . . . . . . . . . . . .
Inadequate Collection Procedures
Have Hampered ADEQ's Revenue-
Producing Effort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADEQ Does Not Verify That
Correct Payments Are Received . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINDING Ill: CONTRACT MANAGEMENT AT
DEQPOOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract Management Deficiencies
HaveBeenCostly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Several Critical Steps Are Needed
To Improve ADEQ's Contract Management Function . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paae
1
TABLE OF CONTENTS ( concl'd)
FINDING IV: ADEQ's EDP FUNCTION NEEDS
MORE EFFECTIVE MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 21
ADEQ Has Been Unable To Implement
Effective EDP Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Changes In EDP Management Are Needed
To Improve The Delivery Of EDP Services . . . . . . . . . . . . . . . . . . 24
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
AGENCY RESPONSE
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Environmental Quality ( ADEQ) pursuant to a September 30, 1992
resolution of the Joint Legislative Oversight Committee. This is the first in a series
of four audits. The audits are conducted as a part of the Sunset Review set forth in
Arizona Revised Statutes $ 841- 295 1 through 4 1- 2957.
Responsibility For Several Key Functional Areas
Is Distributed Throunhout The A~ ency
The purpose of this audit was to review functions that affect numerous Agency
programs and subdivisions, but which would not be fully addressed by an audit of
a particular Agency program or subdivision.
With this in mind, our Office targeted several functions for review, including cost
recovery and revenue collection, contract management, and EDP services. In each
case, management responsibility is dispersed to various Departmental offices,
sections, and units; and in some cases to other governmental agencies. A brief
overview of each of these functional areas details this point:
RENENUE COLLECTIAONND COST RECOVERY - Monies collected either by or for ADEQ
represent the major source of the Agency's funding. In fiscal year 1992, for
example, ADEQ deposited more than $ 35 million into various Agency accounts.
By comparison, total General Fund appropriations for that same period totaled
just over $ 11.6 million.
The Department's non- General Fund revenues come from a variety of fees, taxes,
and penalties assessed for such items as permitting, hazardous waste generation,
pesticide registration, new tire sales, and industrial discharge registration. In
some cases, such as the State's cleanup effort, ADEQ is authorized to recover all
its service costs.
Responsibility for producing and collecting these revenues is shared among
several governmental agencies. For example, air quality fees used by ADEQ for
research and other activities are collected by the State Motor Vehicle Division and
two county governments ( Gila and Santa Cruz).
Other non- General Fund revenues are strictly ADEQ's dominion, however. The
Department has distributed revenue- producing responsibilities to various Agency
subdivisions. Delegated responsibilities include: 1) establishing fee amounts, 2)
billing, 3) determining who owes the Agency money ( and how much), 4) following
up on delinquent accounts, and 5) tracking program costs.
The only centralized activity performed in this area is the collection function,
which is conducted by the Office of Administration's Accounts Receivable unit.
CONTRACTM ANAGEMEN- T P ayments for outside services account for nearly one-fourth
of expenditures at the Department. ADEQ spent more than $ 18.8 million
in fiscal year 1992 for a wide range of activities, including cleanup ( or
remediation) services, legal services, the vehicle emissions program, EDP services,
lab analyses, and consulting services.
Contract management is largely decentralized at the Department. Each of the
four semi- autonomous offices within ADEQ ( Administration, Water Quality,
Waste Programs, and Air Quality) has primary responsibility for identifying the
need for outside services, setting the service requirements, and monitoring the
contractor's performance.
Some contract functions are handled jointly by the Office of Administration's
Contracts and Procurement section and the relevant Agency Office, section or
unit. These functions include developing bid specifications, soliciting requests for
proposals, and selecting vendors.
EDP SERVICE- CSo mputer technology is widely utilized by ADEQ. For example,
in an attempt to create an extensive EDP infrastructure, ADEQ has purchased
450 personal computers, and developed a powerful data communication network
capable of extensive Agency- wide data sharing and integration.
As with contract management and revenue- producing activities, EDP services and
technology are primarily administered by the four Agency OEces. Each has the
authority to identify EDP needs and purchase hardware and software
independently of the others. Moreover, each Office retains its own personnel
devoted to EDP activities.
Audit S c o ~ e
Our audit identified management problems in each of the areas described above.
These problems are addressed in four findings that discuss:
The need to improve the Agency's cost- recovery effort to avoid losing millions of
dollars in potential revenue.
The need to strengthen the Department's overall collection effort to increase
annual revenues.
The need to strengthen ADEQ's contract management function to reduce
excessive and uncontrolled expenditures.
The need for ADEQ to more effectively manage its EDP function.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director and ADEQ staff
for their cooperation and assistance during the audit.
( This Page Intentionally LeR Blank)
FINDING I
ADEQ HAS BEEN SLOW TO IMPLEMENT
COST RECOVERY PROGRAMS
The Arizona Department of Environmental Quality ( ADEQ) has only recently begun
to emphasize cost recovery as an agency priority. Although cost- recovery programs
are meant to ensure that persons or facilities creating the need for environmental
regulation bear the costs of those activities, weak agency efforts in the past have
allowed over $ 1 million in potential annual revenue to go uncollected.
Cost Recovery Is An Important
Environmental Management Tool
Recovering costs from those who create the need for environmental regulation or
clean- up serves at least two purposes: 1) it ensures that the cost of regulation is
borne by the responsible individuals or facilities; and 2) it helps ensure funding for
future activities.
ADEQ has implemented cost- recovery programs in seven areas. Three areas involve
pollution cleanup: emergency response, remedial projects, and leaking underground
storage tanks. The remaining areas involve recovering the costs of certifying
operators, and issuing air quality, hazardous waste, and aquifer protection permits.
Responsibility for cost recovery is dispersed throughout ADEQ: program staff within
each area are primarily responsible for documenting costs, identifying who should
pay, and ensuring that payments are received. Only one aspect is centralized to any
extent: the Office of Administration has a cost- recovery unit that compiles cost
information for nonemergency remediation projects. However, the seven areas handle
all other cost- recovery activities with no Department- wide guidance.
Cost recovery can have significant fiscal implications. In Arizona, State remedial
projects and some emergency cleanup activities are funded by the State Water
Quality Assurance Revolving Fund ( WQARF).' The extent to which the Department
can recover the costs of these activities affects the Fund's solvency and the
Department's ability to undertake additional projects. For example, an effective cost-recovery
effort could partially offset the $ 2.9 million reduction in General Fund
1 The Water Quality Assurance Revolving Fund was created in 1986 by the Environmental
Quality Act. The initial statute authorized $ 5 million in general funds for WQARF. Since that
time WQAFiF has been funded with a combination of dedicated fees, general funds, and cost
recovery collections.
appropriations to WQARF for fiscal year 1993- 94. In like manner, recovering the
cost,. - 3f issuing permits allows the State to help fund some of its essential regulatory
ac- ties.
WGak Recovery Effort Has Cost
ADEQ Over $ 1 Million Annually
Despite the potential fiscal benefits, ADEQ has historically had little success
recovering costs. The Department's failure to effectively or completely implement
cost- recovery programs allowed by law has been costly. A stronger effort would have
added millions of dollars in revenue to the General Fund and WQARF.
Collections for remediation efforts - Although incomplete documentation made
a full accounting of recoverable costs impossible, we still found strong evidence that
ADEQ has not recovered a significant portion of the regulatory costs allo- t- od by law.
For example, although the Department identified $ 15.9 million in recov. ble costs
associated with contamination cleanup between 1987 and June 1993', r review
showed collections of only $ 1.9 million ( 12 percent).
This lack of success in collecting remediation costs is due in large measure to a weak
Departmental effort. For example:
The Department has not attempted to recover approximately $ 2.5 million in
remediation overhead costs. Although these costs are recoverable, ADEQ never
developed a plan to allocate them to specific projects so that responsible parties
can be billed. Because of the Department's inaction, these costs may never be
recovered.
The Department has not attempted to recover almost $ 640,000 for 22 emergency
cleanup projects, even though some of these projects have been complete for as
long as five years2
Despite three- and- one- half years of fruitless negotiations, the Department has yet
to take forceful action against one responsible party that owes the Agency
approximately $ 400,000.
1. Between 1987 and June 1993, ADEQ spent $ 32.6 million on remediation efforts. $ 16.7 million
was not tracked as recoverable expenses, however, with proper documentation, some of these
costs may be recoverable.
2 These costs only represent outside professional service contract expenses. We were not able to
identify site- specific ADEQ payroll and travel expenses because the Department does not
document site costs until after recovery proceedings are initiated.
Air and water aualitv permits - Our review indicates ADEQ's weak effort extends
to other program areas as well. For example, the Office of Air Quality ( OAQ) is
allowed to recover costs associated with issuing permits. Although recoverable costs
are estimated to be $ 763,000 during fiscal year 1993, nearly $ 585,000 will not be
collected due to OAQ's failure to adequately track program expenditures and pass
these costs along to the regulated community.
In addition, although the Office of Water Quality ( OWQ) is authorized to recover costs
for plan reviews, inspections, and wastewater reuse permits, the OWQ has never
initiated steps to recover them. ADEQ does not maintain a record of these total costs.
However, the head of ADEQ's Management, Budget and Audit section used program
activity and staffing records to estimate that uncollected revenues for these activities
could be as high as $ 360,000 annually.'
Greater recovery ~ ossible- Although insolvent and unknown responsible parties
make collecting the total costs associated with remediation unlikely, ADEQ could
substantially increase its recovery rate with a stronger effort. The performance of two
states, identified by ADEQ personnel as having strong recovery programs, show that
recovery rates higher than ADEQ's 12 percent are feasible. Washington's Ecology
Department, for example, reports that it recovered approximately 19 percent of its
remediation costs over a six- year period, while the Oregon Environmental Quality
Department reported a 23 percent recovery rate for a similar time frame. If ADEQ
had matched the performance of Washington and Oregon between July 1987 and
June 1993, it would have added over $ 1 million, or about $ 185,000 annually, to
WQARF. The additional cost for this effort would be minimal since the Department
already has staff in place for most of the needed activities.
In addition, the Department could have generated an additional $ 945,000 in State
revenues annually if ADEQ had established recovery programs for plan reviews and
wastewater reuse permits, and collected all monies allowed for air quality permits.
Cost Recovery Has Not Been
A Departmental Priority
Despite its obvious fiscal benefits, cost recovery programs have historically not been
an agency priority. Lack of commitment by key Agency managers has caused these
programs to stagnate. Although fiscal constraints have enabled ADEQ's current
Director to motivate these managers to treat cost recovery as a priority concern, any
serious attempt to improve these programs will require the development of policies
and procedures to guide staff.
1 This annual figure does not include uncollected revenues for activities related to inspections.
Because costs associated with this function have been inconsistently tracked, it was not possible
to present a reliable annual figure.
Lack of commitment - Cost- recovery efforts have been hampered by the low priority
given them by Agency managers. Numerous program managers have told us that cost
recovery has simply not been a pressing concern. These managers have stated that
unless they receive direct benefit from monies recovered, they generally will not
actively pursue recoverable costs. This attitude seriously hinders the Agency's
recovery effort, since most recovered funds go to the General Fund or WQARF, and
not to the program area.
The low priority given to cost recovery by the Department is also evident in its
passive approach toward parties responsible for contamination cleanup. Our review
showed the Department has traditionally been unwilling to aggressively seek
repayment of costs incurred. Typically, ADEQ postpones action or negotiates with
responsible parties beyond a fruitful point. For example:
Although the responsible party consistently refused to cooperate with ADEQ for
over three years, the Department waited until May 1993 to file suit to recover
approximately $ 400,000 in monies owed.
Likewise, after identifying another responsible party in 1989, ADEQ did nothing
to recover approximately $ 427,000 in Agency costs for one year. The Department
then spent one- and- one- half years in futile negotiations before initiating legal
action in 1993.
Fiscal necessity combined with the efforts of the current ADEQ Director has spurred
the Department to take a greater interest in cost recovery activities. The elimination
of General Fund appropriations for the WQARF coupled with low fund balances have
impeded the Agency's ability to fund Agency programs. This development has helped
the Director motivate reluctant Agency managers to emphasize cost recovery as a
necessary Agency function. For example, ADEQ has initiated proceedings for current
as well as former cases. As noted in the examples above, the Department recently
filed suit in two long- standing cases. In addition, ADEQ is working with the Attorney
General's Office to determine whether expenses associated with previous emergency
response incidents can still be recovered.
Policies and ~ rocedures- ADEQ needs to followup on these efforts in order to
sustain the momentum it has built. Any serious attempt to improve ADEQ cost
recovery will also require the Department to develop a comprehensive set of policies
and procedures. As noted previously, responsibility for cost recovery is dispersed
throughout the Agency. ADEQ does not have policies and procedures which: 1)
identify cost- recovery roles and responsibilities within the Agency, 2) facilitate a
systematic method for tracking, documenting, and allocating costs, 3) explain how to
handle situations that arise frequently, such as uncooperative responsible parties,
and 4) establish time frames for followup action. This lack of direction has caused
confusion among Agency personnel. Once policies and procedures are developed,
moreover, all staff involved in cost- recovery activities will need to be adequately
trained to ensure effective implementation.
RECOMMENDATIONS
1. ADEQ should ensure that cost- recovery proceedings are initiated for all
programs where statutory authorization exists.
2. In order to more effectively recover costs, ADEQ should:
Develop a policy and procedures manual for each cost- recovery system. The
policies and procedures should address, at a minimum:
- cost- recovery roles and responsibilities within the Department,
- systematic methods for tracking, documenting, and allocating costs,
- how to handle situations that arise frequently, such as uncooperative
responsible parties, and
- time frames for action.
Provide training to all employees involved with the cost- recovery process.
Initiate recovery proceedings as soon as a responsible party is known.
Limit negotiations to a reasonable time period.
( This Page Intentionally Left Blank)
FINDING I1
ADEQ CAN COLLECT AN ADDITIONAL
$ 396,000 ANNUALLY IN FEES
ADEQ's collection process is poor. In addition to revenues lost due to poor cost
recovery ( see Finding I), we also identified $ 396,000 in uncollected fees during 1992.
Other revenues may also be uncollected because the Department does not verify that
correct amounts are collected.
Inadequate Collection Procedures
Have Hampered ADEQ's
Revenue- Producinq Effort
The Department does little to ensure that all monies owed are collected. We reviewed
collections for 9 of the 12 fees collected directly by ADEQ in 1992.' Although these
fees generated $ 2.4 million for the Department, we estimated the Agency could have
collected an additional $ 396,000 in calendar year 1992.2
Our review showed that ADEQ collection practices are weak in comparison to those
employed by the Internal Revenue Service, and other State agencies, including the
Attorney General and the Departments of Revenue and Transportation. Currently,
the Agency's Accounts Receivable unit simply bills facilities for fees owed, and
documents payments that are made. Personnel within this unit claim that the lack
of 1) management direction, 2) statutory authority, and 3) adequate stafing have
prevented them from implementing followup actions used by other collecting agencies.
For example:
MULTIPLEB ILLINGS- ADEQ's use of second billings has been sporadic. The
Department's practice has been to mail past due notices only when time permits.
As a result, only 50 percent of the 1992 delinquent accounts we analyzed received
notices by the Agency that monies were unpaid. Moreover, some of the second
billings that were sent took nearly a year to prepare.
-
1 We did not review three of ADEQ's fee categories. We were unable to review the underground
storage tank activity tax due to inadequate documentation. We also did not examine the dry
well registration fee, as it is a one- time fee which is collected in advance. Furthermore, we
did not analyze the hazardous waste manifest fee as the Department was late initiating this
fee program and the collection of 1992 fees did not begin until after our audit.
2 Our methodology was designed to avoid overstating lost revenues. We eliminated any facility
which we suspected may not have been truly delinquent, either because it had closed or
because it did not owe ADEQ a fee for that particular period. The net result of this purging
was that we probably underestimated the total amount of revenues lost.
11
At a minimum, ADEQ should establish a system for sending second billings that
inform facilities of their obligation to pay and the consequences of not paying. The
Department of Revenue sends past- due notices and contacts debtors by phone to
produce payment. Likewise, the Internal Revenue Service follows up on past- due
accounts with up to four letters demanding payment.
LATEP ENALTIE- SA DEQ lacks statutory authority to assess penalties for all but
two fee categories. However, even where the Agency does have authority, the
Department takes no coordinated action to ensure that fines are actually paid. We
were told by accounts receivable staff that they do not have time to ensure that
penalties are paid.
The Department should request authorization to assess late penalties on all fee
categories and should ensure that penalties are paid when appropriate. Both the
Internal Revenue Service and the Department of Transportation assess penalties
on accounts that are not paid. When the Internal Revenue Service sends billings,
the unpaid balance plus penalties and interest are shown as the amount due and
until the full amount due is paid, penalties and interest continue to accrue.
COLLECTIOANG ENCIE- S ADEQ does not routinely pursue payment for past- due
accounts or use collection specialists. In fact, billing statements for subsequent
periods do not indicate past- due amounts from previous billings.
If the Department is unable to collect payment through its own efforts, it should
refer uncollectible accounts to a collections specialist. The Department of
Transportation's procedure is to refer its past- due accounts to the Attorney
General or a private collection agency ( depending on the amount owed) when all
other collection efforts have been exhausted.
ADEQ Does Not Verify That
Correct Pavments Are Received
In addition to monies lost due to a poor collection process, the Department's inability
to verify that payments are accurate may be causing other revenues to be lost. Seven
fees collected by ADEQ are based on information provided by regulated facilities. In
one case, for example, the fee amount owed is based on total tons of waste disposed
into a landfill. In another, the fee paid is dependent on the amount of pollutant
discharged by a regulated facility into State waters.
Although collections for these fees are substantial ( over $ 1.4 million during 1992),
ADEQ does not have enough personnel to confirm that correct amounts are paid. In
most cases, the Department would need to audit records housed with the regulated
facilities, but the Agency has no staff to perform this function.
We found evidence that suggests auditing facility records would be beneficial. For
example, in a very limited review ( 28 of 2,402 total Agency accounts)', we found 12
cases that indicated the Department was underpaid $ 65,300. In each case, we found
discrepancies between what was reported by the facilities on their fee statements and
what was reported by them on other documentation. For instance, we noted one
company stated on its fee statement that it burned 414,444 gallons of used oil and
thus owed ADEQ $ 24,867 ($. 06 for each gallon burned). However, according to ADEQ
records, other information submitted by the facility showed it actually burned more
than 1 million gallons. Thus, it seems that ADEQ was underpaid almost $ 36,000.
Without a viable audit function, ADEQ will not be able to ensure that payments
requiring verification are correct. Although the Department is authorized two internal
auditors, these positions are currently vacant due to budget constraints. Given the
potential for lost revenue, our review suggests filling these positions would be cost-effe~
tive.~
1. ADEQ should improve its collection process by:
utilizing timely past- due notices which inform facilities of their obligation
to pay and the consequences of not paying;
assessing late penalties where authorization exists; and
utilizing collection agencies when all other efforts have failed.
2. The Department should request authorization from the Legislature to assess
late penalties where such authority has not been granted.
3. To ensure that correct payments are received, ADEQ should fill at least one of
its internal audit positions.
1 We reviewed accounts from three of the seven fee categories which base the amount due on
information provided by the regulated facilities.
2 Funding the two internal audit positions would cost ADEQ approximately $ 71,000 annually. This
amount covers payroll and employer- related expenses, operating costs, and in- state travel.
( This Page Intentionally Left Blank)
FINDING Ill
CONTRACT MANAGEMENT
AT ADEQ IS POOR
ADEQ needs to strengthen its contract management. Lack of expertise and a weak
contract and procurement function have led to questionable contract expenditures.
To control costs and ensure adequate service delivery, ADEQ will need to: 1) develop
policies and procedures, 2) provide staff training, and 3) increase the role of its
Contracts and Procurement section.
Contract management is critical to the ADEQ's success in carrying out its assigned
responsibilities. The Agency spent approximately $ 19 million in fiscal year 1992
( nearly 25 percent of its total expenditures) for a variety of contracted services,
ranging from the cleanup of contaminated sites to EDP services. The Department has
been delegated unlimited authority to manage its contract expenditures within the
guidelines established by the State Procurement Office. ADEQ has elected to
decentralize its contracting function by giving much of the administrative authority
to the Agency's various program areas, thus reducing the role of its Contracts and
Procurement section.
Despite the importance and large dollar value of ADEQ's contracts, the Agency
managers were not aware of the full scope of its contract activities. Information
regarding how much the Agency was spending for contracted services, and how many
contracts were currently in effect was not readily available. As a result, we reviewed
ADEQ's contracting process in detail. We selected 12 contracts totaling more than $ 7
million for our analysis. l
Contract Management Deficiencies
Have Been Costlv
Our review confirmed that contract management at the Agency is weak. As the four
cases presented below demonstrate, ADEQ's lack of adequate in- house expertise and
the diminished role of its Contract and Procurement section have resulted in
excessive or uncontrolled expenditures for contracted services:
1 Although the total number of contracts currently in effect is unknown, we were able to
determine that the Agency administered at least 160 contracts during fiscal year 1992. Time
constraints and the large number of Agency agreements made a complete contract review
impossible. We analyzed contracts with high dollar values and diverse service requirements.
ADEQ's lack of expertise, as well as its haste to implement the program, added
as much as $ 1 million to the contract cost for removing waste tires throughout the
State. Rather than have vendors set a fair price based on a measurable senrice
requirement, such as the cost per tire disposed, ADEQ agreed to pay the winning
contractor 55 percent of all revenues collected in the State's Waste Tire Fund,
regardless of the number of waste tires disposed of by the vendor.
Consequently, when the number of waste tires removed by the vendor turned out
to be little more than one- half ADEQ's original estimate of 6 million, the
Department was still obligated to pay the vendor 55 percent, or $ 2.4 million of the
Funds' revenues. This increased the cost for the disposal service from $. 42 per tire
removed ( the maximum amount ADEQ anticipated paying based on its initial
estimate of waste tires) to $. 71 per tire.
The State Procurement Office ( SPO) was highly critical of this contract. According
to SPO's assistant administrator, ADEQ's failure to request vendors to bid on a
measurable service ( such as the price per removed tire) artificially drove up the
cost of the contract.
ADEQ procurement officers agreed that the contract was poorly conceived and
that its procurement staff lack the training needed for administering contracts of
this sort. An ADEQ official stressed that the need to quickly start up the program
prevented the use of " optimal procurement practices."
An inappropriate evaluation of vendors competing to design, build, and install
over $ 1 million worth of modular furniture for its new headquarters required
ADEQ to purchase $ 120,000 in unneeded furniture.
The State Procurement Code requires agencies to clearly state the procedures they
intend using to evaluate vendors' proposals. ADEQ failed to do this, however.
Instead, Agency staff developed the evaluation procedure during the contracting
process itself.
As a result, the Department ultimately used three separate and different
evaluations before finally deciding upon the winning vendor. ADEQ never
indicated beforehand how many evaluations would be used, and, according to
State Procurement officials, this use of multiple evaluations gave the appearance
that ADEQ was prolonging the selection process until the vendor it favored was
selected. ADEQ staff claimed that ambiguities contained in the Agency's request
for vendor proposals caused them to add additional evaluations to obtain the best
possible product.
When one losing vendor protested the fairness of the evaluation procedure, ADEQ
proceeded with the purchase despite being warned by the State Procurement
Office that the vendor's protest was valid. The vendor persisted in its protest,
however, and the Department agreed to purchase $ 120,000 in new chairs from the
protesting vendor rather than face legal action and move to their new facility
without the needed modular furniture.
ADEQ had not intended to purchase chairs when it originally initiated its
furniture contract, and could have avoided this unnecessary expenditure with a
proper understanding of the State Procurement Code.
ADEQ repeatedly amended four remediation contracts to increase project funding
during fiscal years 1992 and 1993 without adequately reviewing the need for those
increases. The contract amendments raised the total cost of the four contracts by
$ 571,000, or 60 percent of the original contract amounts. In some cases,
contractors' requests for increased funding were presented simply as " continuation
of work." Although cost increases are not unusual in remediation contracts, ADEQ
did not review the requests to determine if the payments in excess of original
contract amounts were justified. In other cases, ADEQ contract staff increased
contract amounts without a contractor request because contract balances appeared
to be low.
Any effort to review the justifications for the requested increases would have been
ineffective because some of the remediation contracts had vague work plans. For
example, one contract " work plan" consisted of little more than generic
descriptions of the types of work that might be performed: ' perform technical
reviews, ... p rovide training programs, ... sampling monitoring wells and analysis."
In no case did the contract specify what these activities should entail. Such
limited descriptions provide little basis for evaluating the adequacy of a
contractor's work or justification for requested payments. As a result, ADEQ
creates an opportunity for vendors to inflate the costs for these services.
A review of two of ADEQ's intergovernmental agreements ( IGA) with the Attorney
General's Office identified instances in which ADEQ advanced monies under
vague and undefined contract terms.' While ADEQ must use the AG's Office for
required legal services, sound contract management practices should be extended
to IGAs to ensure that services provided under these agreements are meeting
expectations within the agreed- upon price.
1 In addition to the typical legal services provided to most State agencies, ADEQ also contracts
with the Attorney General for services related to its remediation function.
17
Nationally recognized standards require t h a t services and : tract
deliverables be clearly defined; yet, in the two IGAs that we examined found
that the Department advanced the AG more than $ 344,000 under vaa ntract
terms.
For example, no provisions were included that required the AG to specify how
monies were being spent.
These deficiencies have caused problems for the Department in the past. In one
case, ADEQ's failure to insist that costs be adequately detailed was one reason
the Environmental Protection Agency decided it would no longer advance
payments for legal costs associated with the Stat. s remediation effort.
A strong Contracts and Procurement section could have helped avoid this by
insisting on clearer contract terms before these IGA's were sent to upper
managr ? nt for signature. Although this section is accountable for the adequacy
of all D trtment contracts, the contract specialist assign( 50 oversee IGAs with
the A@ as unwilling to challenge a contract's inadequz . s once his superiors
had approved it.
Several Critical Steps
Are Needed To Improve ADEQ's
Contract Mana~ emenFt unction
As the cases above demonstrate, the Department's failure to adhere to accepted
contracting standards has been costly. Basic, but critical steps, such as developing
policies and procedures and staff training, are needed to address contract
deficiencies. The Department will also need to establish greater role for its
Contracts and Procurement section to assure a more coordini d contracting effort.
The State Procurement Ofice should assist ADEQ in its effort by providing needed
guidance and closer monitoring.
PROCEDURES AND ! lhlMNG - Agency staff with contract responsibilities are largely
unaware of the requirements needed to obtain quality services, and therefore, do
not always follow sound procurement practices. To address this, the Department
needs to develop policies and procedures to guide its contracting process.
Specifically, policies and procedures are needed: 1) to define the contract
responsibilities of all Agency personnel, and 2) to discuss legal requirements and
national standards for all phases of the contracting process. To be effective,
ADEQ must disseminate these policies and procedures to all staff involved in
contracting and provide training needed to ensure they are familiar with them.
CONTRACTASN D PROCUREMENT SECTIO- NI n addition, the Department needs to
strengthen the role of its Contracts and Procurement section. Specifically, the
section staff should work with the individual program personnel to define service
requirements and evaluate contract proposals. Furthermore, section staff should
assist program staff in monitoring vendor performance through periodic reports
and meetings with program staff and contractors. Greater involvement by the
Contracts and Procurement section should facilitate a more efficient contracting
process by adding consistency and coordination.
THES TATPER OCUREMEOFNFTIC E - SPO should assist in the Department's efforts
to upgrade the contract process by providing the guidance necessary to ensure
that needed changes are effectively implemented. Specifically, the Office should
review the adequacy of policies and procedures developed by ADEQ and help
train Agency staff.
In addition, SPO should review ADEQ's performance to determine if any changes
are needed in the Department's purchasing authority. SPO has delegated
unlimited purchasing authority to ADEQ under the Arizona Procurement Code.
However, SPO retains responsibility for this function and may withdraw or
modify the delegation if necessary. Our review indicates that ADEQ's purchasing
and contract management has not fully protected the State's interests.
RECOMMENDATIONS
1. To improve its contracting process, ADEQ should:
develop and distribute policies and procedures outlining steps for managing
contracts to all relevant Agency personnel
provide necessary training to all relevant Agency personnel
increase the involvement of its Contracts and Procurement section to ensure
and enforce compliance with State laws and national standards pertaining to
contracts.
2. The State Procurement Office should assist in the Department's efforts to
upgrade the Agency's contract process. Specifically, the State Procurement OEce
should review ADEQ purchasing policies and procedures developed in response
to Recommendation 1 to ensure that they adequately protect the State's
interests. If SPO determines that the proposed changes are not adequate to
correct the problems identified in this Finding, it should consider rescinding or
limiting ADEQ's unlimited delegation of purchasing authority.
FINDING N
ADEQ'S EDP FUNCTION NEEDS
MORE EFFECTNE MANAGEMENT
Ineffective management is preventing ADEQ from taking significant advantage of
its electronic data processing ( EDP) technology. Our review showed that attempts
to improve information management by investing in EDP have been poorly handled.
ADEQ's efforts are hampered by a fragmented management structure incapable of
effective Agency- wide oversight.
ADEQ Has Been
Unable To Implement
Effective EDP Systems
Department attempts to better manage its information resources by investing in
EDP technology have been largely ineffective. Anticipated improvements have been
offset by the Agency's inability to adequately plan and coordinate its EDP effort.
Like many private and public organizations, ADEQ depends on an adequate flow
of information to carry out its various responsibilities. For example, mandated
regulatory activities in its water, air, and waste management programs can only be
conducted by maintaining, updating, and evaluating information on an estimated
40,000 locations, and pollution sites. Even seemingly routine administrative
activities, such as processing fees paid by the regulated community, can only be
accomplished through extensive data gathering and recordkeeping.
Information management through EDP - Managing its information resources
has traditionally been troublesome for ADEQ. A task force set up in 1991 to address
concerns in this area reported that " The inability of managers and staff to access
pertinent information in a quick and easy manner has repeatedly paralyzed the
decision- making process."
ADEQ has made an effort in recent years to improve information management at
the Agency by enhancing its EDP capabilities. For example, the Department has
purchased 450 personal computers ( PC), developed new data management systems
( including a high- powered mini- computer with multi- faceted capabilities), acquired
numerous supporting software packages, and installed ten Local Area Networks,
called LANs.'
The Department hoped these activities would help create an extensive EDP
infrastructure by: 1) improving employee access to relevant program data, 2)
facilitating data sharing and integration within and across program lines, 3)
providing useful information on program performance, and 4) eliminating redundant
information gathering.
Ineffective imltllementation ofEDP svstems - For the most part, the benefits
ADEQ hoped to achieve through its recent investment have not materialized. For
example, despite spending approximately $ 1.8 million, the Department has not
effectively utilized the capability of its new LAN technolo& The ten LANs were
supposed to improve efficiency through increased information sharing and data
integration, and by reducing unnecessary data gathering. These objectives have not
been met to any significant degree. Information continues to be largely gathered,
maintained, and used in isglation, either on individual PCs, or in manual filing
systems scattered throughout the different program areas.
Consequently, access to relevant program information continues to be cumbersome,
and the potential for redundant data gathering remains exceedingly high. For
example:
Separate databases are being unnecessarily maintained on personal computers
by three units in the Office of Waste Programs due to their failure to coordinate
data acquisition and information sharing. For example, at least two of these
units routinely gather and use information relating to waste facilities,
inspections, enforcement actions, and case resolution. This duplication of effort
could be avoided if a single system was developed and maintained on the LAN
for this Office.
A Local Area Network, generally referred to as a LAN, is a group of PCs interconnected via
wiring and utilizing a high- performance personal computer called a file server. File servers,
which typically have large storage capacities and fast operating speeds, allow software and
data to be shared between and among the connected PCs.
By using fiber- optic technology to interconnect its ten LANs, ADEQ has created a powerful
data communicating system capable of extensive, Agency- wide data sharing and integration.
Costs for LAN technology include: A fiber- optic network, consulting services, and personal
computers.
In another case, a top Agency official expressed frustration that it took the
Department three weeks to ascertain a single vendor's compliance history. This
lengthy search could have been avoided if the Agency was using the LANs'
capability for integrating the Department's various sources of information.
Finally, since provisions were never made to maintain relevant program
information on the LANs, an ADEQ employee was required to conduct an
extensive and time- consuming search of the many databases and manual filing
systems in order to compile the State's biennial Water Quality Assessment
report for the Environmental Protection Agency ( EPA). The report took more
than a year to complete and required the Department to seek an extension from
the EPA.
The Department's failure to effectively utilize its LAN technology is indicative of the
Agency's overall lack of adequate planning and systems development procedures. As
shown by the cases described above, the Department has not made a systematic
effort to identify and bring information of common and cross- functional interest to
its staff.
This kind of omission is possible because EDP systems are implemented in isolation,
with no adequate Agency- wide system of policies, standards, and controls to ensure
the effectiveness ' and reliability of its information technology.
Questionable planning, systems development, and maintenance strategies have
repeatedly marred Department efforts to implement EDP systems. For example:
THER EVENUE MANAGEMENTS YSTEM( RMS)- Apparently intended to facilitate the
collection of all fees assessed by the Agency, development of this system was
discontinued after entering into several contracts totaling more than $ 80,000.
The project was suspended when Agency officials became uncertain of RMS's
ability to perform needed functions. ADEQ oficials are now reassessing Agency
needs to decide whether to resume work on the RMS, or develop a new system
altogether. In the meantime, the Department continues to use manual ledgers
and simple Lotus spreadsheets to track Agency revenues.
THE AQUIFERP ROTECTIONP ERMIT( SA PP) SYSTEM- Intended to standardize and
simplify the process of issuing and monitoring various pennits overseen by the
Agency's APP program, further development of this system has been halted
indefinitely due to the Agency's inability to arrange suficient funding.
Consequently, despite an investment of over $ 75,000, the system is unable to
perform many of its intended functions. For example, only three of the seven
types of permits issued by the program can be processed by the system.
Likewise, other planned objectives, such as tracking the status of permit
applications, and monitoring vendor compliance with permit requirements,
cannot be performed using the APP system. Instead, program staff are
performing some of these functions on other databases and electronic
spreadsheets.
Additionally, the decision to use nonstandard software means that any design
modifications required to the system can only be made with outside assistance.
Similarly, the choice of software may limit the potential for integrating the APP
system with other data systems in the Department.
WATERQ UALITPYO LLUTIODNA TABAS- E I ntended to help track the compliance of
facilities with water quality permits, problems related to data reliability and
system maintenance have negated this system's utility. According to one
knowledgeable user, the database is " broken." The system was never fully tested
and is not capable of producing all desired results. We also found the system is
not being adequately maintained. Data is incomplete and inaccurate, and poor
controls over system modifications and changes to data files have compromised
the database's integrity.
Changes In EDP Management
Are Needed To Improve
The Delivew Of EDP Services
The problems ADEQ has experienced with its information technology are due to the
lack of coordinated executive- level involvement in managing the Agency's EDP
function.
A decentralized approach to EDP management has dispersed responsibilities for
providing EDP services among and within ADEQ's various subdivisions. Systems
are developed and maintained based on priorities established and resources
available within each subdivision. Separate funding contributes to this independence
and results in minimal Agency- wide direction.
Fragmented resl~ onsibilitv- Although decentralization of EDP services can be a
viable management strategy, ADEQ has been unable to institute an adequate
mechanism for ensuring needed Agency- wide coordination, cooperation, and guidance
among and within its various subdivisions. For example:
ADEQ's OfEce of Administration has an Information Resource Management unit
( IRM) dedicated to EDP. In the past, this unit has assumed responsibility for
EDP services within the Department. However, due to conflicts with other
Agency subdivisions, the role of IRM has become unclear. Groups such as IRM
frequently play a prominent lead or support role in the administration of an
organization's EDP. The Department's IRM, however, has not been able to gain
program acceptance in either capacity, leaving the Agency without this
traditional means for coordinating EDP activities.
An EDP committee formed in 1991 was likewise unable to win the support
needed to facilitate a coordinated EDP direction within the Department. The
committee, which was led by the Deputy Director and consisted of mid- level
staffers from various parts of the Agency as well as staff from the IRM unit, had
ambitious plans for guiding the Department's EDP effort. However, the
committee lacked proper Agency- wide support and had little impact. It was
disbanded earlier this year.
A key result of ADEQ's inability to find a viable means for coordinating its EDP
effort is that the Agency has not developed an adequate system of policies,
standards, and controls, which is crucial to effective EDP management. This
deficiency has directly contributed to the problems cited.
Information services at the Department will continue to suffer until the Agency's
executive management team takes a more active leadership role in this area. Strong
executive commitment is critical to any successful EDP effort. ADEQ's problems
with EDP have perpetuated because top Agency oficials have not made a concerted
effort to address them.
To begin to address its EDP problems, the Department must create a viable
executive- level Steering Committee to guide the development of the Agency's EDP
technology. To avoid the failings of the previous EDP committee, this committee
should be composed, at a minimum, of executive- level staff, senior program
managers, and key EDP personnel.
In addition, the ADEQ Director must demonstrate strong support for the new
Steering Committee by directing all units to cooperate with the Committee and
using its recommendations as the basis for coordinating EDP at the Department.
The Director may also consider providing the Committee with its own funding,
which would allow it to manage and coordinate EDP projects with Agency- wide
implications.
Once the committee is in place and executive support is established, ADEQ will
need to embark on a number of critical activities. We recommend the following as
priorities:
DEVELOPMENOTF A STRATEGIPCL AN - A framework for guiding the ADEQ's
investment in information technology is needed. A strategic plan would address
this deficiency by outlining the Department's goals and objectives, as well as its
human and technical resource needs, and establishing the generic criteria for
achieving those ends.
DEVELOPMENOFT FORMAPLO LICIEASN D PROCEDUR- EOSn ce a plan is in place,
detailed methods for implementing the Agency's strategy will be required.
Policies and procedures will serve this purpose by setting standards and controls
for critical factors such as systems development and maintenance, security, and
disaster recovery.
DEFINITIOONF ORGANIZATIORNOALLES - Responsibilities are dispersed among and
within the ADEQ's four major subdivisions, with no clear separation of duties.
Establishing clearly defined roles will help prevent uneven administration of
policies and procedures by establishing clear- cut lines of authority and
accountability.
Our recommendations are not intended to create a centralized EDP hierarchy. Given
the decentralized nature of EDP at ADEQ, such an arrangement would not be
workable. Rather, these recommendations will help create a balance between the
needs of individual program areas and the Agency as a whole by establishing a
framework from which EDP systems can be effectively implemented and integrated.
RECOMMENDATIONS
1. ADEQ should create an executive- level Steering Committee in order to ensure
adequate leadership of its EDP function. The Committee should be given
sufficient funding to allow it to manage and coordinate EDP projects with
Agency- wide implications.
2. ADEQ should make the following activities top priorities:
a) The development of a strategic plan to outline the Department's goals and
objectives, and establishment of the generic criteria for achieving those
goals.
b) The development of formal policies and procedures to set standards and
controls that address critical factors, such as systems development and
maintenance, security, and disaster recovery.
C) The definition of organizational roles to establish clear lines of authority
and accountability and prevent uneven administration of policies and
procedures.
d) The allocation of separate funding sources for Agency- wide EDP objectives.
Z 1 ' ? I j = & ' ARIZONA DEPARTMENT OF ENVIRONMENTAL QUALITY
FIFE SYMINGTON. GOVERNOR
I August 17, 1993
Douglas R. Norton
Auditor General
State of Arizona
2700 N. Central Ave., Suite 700
Phoenix, Arizona 85004
Dear Mr. Norton:
Thank you for the opportunity to respond to the Management Audit Report ( the
Report) on the Arizona Department of Environmental Quality ( ADEQ). Overall
the ADEQ Management Team and I feel that the report has correctly identified
many areas which need improvement and your recommendations ( where they are
provided) will assist us in making needed changes. There are, however, some
areas where:
We are concerned about the oversimplification of issues;
We feel the report fails to identify many of the problems as
historical; and,
We feel the report fails to recognize the efforts underway to
address those problems.
Specifics regarding the above statements will be discussed in greater detail
in our comments to each finding.
Within six months of taking this position in July of 1991, I recognized that
many of the most basic managerial infrastructure systems did not exist at
ADEQ. I remember asking where the Agency Policy and Procedure Manual was kept
and being told that one was not available. Moreover, in 1991, when
interviewed, many of ADEQ's personnel ( including management) stated that they
were uncertain about the purpose of ADEQ's programs and their individual roles
in implementing those programs. Within my first year I acknowledged in
speeches to the public and to the Legislature that it would be easier to
create a department from scratch than to analyze the existing systems, design
new systems and impose them on a traditional bureaucracy. Again, your Report
is helpful to confirm our observations and will assist us in providing
direction for change.
Without making excuses, I think it is important to note that ADEQ is a young
agency having been created in 1987 with 120 employees. Within five years the
agency has expanded to over 600 full- time employees, 60 separate programs and
has been subject to considerable political and organizational turmoil as
evidenced by the turnover in the agency's leadership ( five directors in six
years). Unfortunately during this turmoil the agency was faced with balancing
the need to focus its resources on the environmental crisis de jure or
implementing sound managerial systems. While we know that the political fires
must be fought, it is unfortunate that the past senior management did not also
spend the necessary resources to establish the fundamental infrastructure to
run the agency on a day- to- day basis.
The Department of Environmental Quality is An Equal Opportunity Affirmative Action Employer.
Post Office Box 600 Phoenix, Arizona 8500 1- 0600
Recycled Paper
Douglas R. Norton
August 17 , 1993
Page 2
Acknowledging the management systems crisis at the Department is only a first
step in solving the problem. In order to correct the problems, it is
necessary to analyze the preeent system, develop improved systems and then
implement them. As you are aware from your role as Auditor General, this is
not an easy task even when you have the trained personnel of your office. It
is more difficult when the agency's budgets have been reduced and resources
for the management analysis competes with implementation of the programs which
protect public health and the environment.
In any case, this administration is committed to improving ADEQ's management
systems. We have implemented an agency- wide Business Procees Improvement
( BPI) effort to direct thie change. Thia effort which is the work of staff
and external customere is intended to define the existing agency processes and
identify those areas which can be improved through changing the way we do
business and/ or by implementing policies and procedures. The BPI process will
not only look at individual programs but also the cross- program functions
where management systems often break down.
As I previouely stated, ADEQ takes no exception to the four management
problems described on page three of the Report. We identified these problems
early in this administration and continue to work to address them as indicated
in our specific comments to the findings which follow:
FINDING I: ADEQ HAS BEEN SLOW TO IMPLEMENT COST- RECOVERY PROGRAMS
When this administration arrived in mid- 1991, they found no effective cost-recovery
capability within ADEQ. Within the first few months, the new
administration embarked upon building the tools necessary to perform
aggressive cost recovery. Since that time:
Files were reviewed for necessary background information;
A labor distribution system was developed. Proper distribution of staff
time to specific projects, sites and activities is fundamental to
effective costs recovery. Recognizing this, ADEQ contracted with KPMG
Peat Marwick to acquire and refine the labor distribution component of
the Uniform State Accounting System ( USAS) to support our cost recovery
program. That system is available for use State- wide, and today, other
agencies are considering following ADEQ's lead; and,
Cost recovery packages were assembled.
These efforts have resulted in significant progress in coat recovery and has
set in place the procedures and infrastructure necessary to continue
aggressive efforts. As a result, actual cost recovery rates in FY 1993
doubled over the prior fiscal year.
It is important to note, however, that development of a cost recovery package
does not mean immediate revenue generation will occur. One such case is the
$ 1.2 million settlement with Nucor, which the Report failed to recognize.
While the District Court has approved the settlement, a third party has
challenged it, delaying payment. While we are confident of ultimately winning
the appeal, actual collection of the monies will not occur in the near future.
It is also important to recognize that negotiation6 often take considerable
time and result in less than the initially specified amount. However,
negotiations may be more profitable than expensive protracted litigation which
may go on for years. We are also developing a model consent decree to
facilitate negotiations with responsible parties.
Douglas R. Norton
August 17, 1993
Page 3
ADEQ recognizes the need to better recover permitting and similar costs
throughout the Department. For this reason, we:
Performed an extensive analysis on the costs associated with Aquifer
Protection Permits ( APP) in June 1991 and adopted a fee rule in January
1992 which established an hourly rate of $ 31.84, with caps by category,
to recover the direct costs associated with the APP permitting program.
While we had attempted to adopt a rule to recover " full" costs, concerns
on the impact of the increased fees to industry resulted in the passage
of S. B. 1271 which limited cost recovery to direct costs and imposed fee
caps by permit category.
Conducted an extensive Workload Analysis ( WLA) in January and February,
1993, to document existing air permit program costs and to implement new
permit and inspection fee authority. As a result of that work, ADEQ has
identified an hourly rate for permit processing of $ 53, up from the
previous rate of approximately $ 21 per hour, and imposed that new rate
on July 1, 1993. In addition, the WLA provided the basis for
development of a new system of permit, inspection and emission- based
fees. Those draft rules were approved by the Governor's Regulatory
Review Council in June 1993, and are currently undergoing public
comment.
Issued a Request for Proposals to obtain a contractor to conduct
workload analyses and assist in the setting or revising fees for the
Aquifer Protection Permit, Solid Waste, Special Waste, and Plan Review
Programs. After the analysis, ADEQ will have to initiate rule- making
before collecting the fees.
FINDING 11: ADEQ CAN COLLECT AN ADDITION S396.000 ANNUALLY IN FEES
ADEQ recognizes that historic fee collection practices need improvement. Past
mistakes, however, should not color the review of contemporary practices.
This audit reflects past practices which have been improved during this
administration, and in part is not contemporary with current operations.
In April 1991, ADEQ centralized fee collection activities to improve
compliance; ensure checks and balances over receipts and deposits; and,
document proper accounting procedures.
ADEQ put in place a program of systematic follow- up for all validated
delinquent accounts in. FY 1993. For the last six months we have been
sending second billings to 100% of the validated non- payors. Second
billings are, however, only one aspect of the necessary follow- up. In
addition, ADEQ addressed mathematical error., either in favor of the
State or the payor; demand letters for additional information; letters
addressing questions asked by the rate payor; and, third letters of
collection. We are documenting procedures to continue these aggressive
billing practices.
We concur with the recommendation to seek penalty authority for unpaid
billings and have incorporated the requirement into the proposed ADEQ Omnibus
Environmental Quality bill for this Legislative session.
We agree that an internal audit unit is important to the functioning of the
Agency, and we established the ADEQ Office of Management, Budget and Audit in
1992. While fiscal constraints in FY 1993 prohibited us from implementing the
audit function, we have completed preliminary interviews for the audit
positions and anticipate filling at least one of the audit positions within
the next 30 days.
Douglas R. Norton
August 17, 1993
Page 4
With regards to the recommendation to utilize the services of an outside
collection agency, ADEQ lacks resources to pay for this proposed new function.
We will, however refer collections to the Attorney General who will be
exploring the legality of entering into a contingency relationship which would
allow the private collection entity to retain a portion of the monies due the
State for their services.
FINDING 111: CONTRACT MANAGEMENT AT DEQ IS POOR
ADEQ concurs that our contracts could be better written and could benefit from
greater oversight. We are receptive to the recommendations that will improve
these functions. ADEQ concurs that responsible contract management is one of
the Agency's principle responsibilities. The intereets of the State must
always be protected.
We acknowledge that the waste tire procurement process could have been
improved. However, given the market for used tires, it is questionable that
we would have saved $ 1 million.
We disagree, however, with the Report's conclusion that as part of the Modular
Furniture Contract, ADEQ purchased unneeded furniture. New chairs had been
scheduled for later acquisition as part of the conversion from conventional
desks to modular work stations. At the time that the protest was received,
ADEQ, the State Procurement Office ( SPO) and the Attorney General concurred
that, while the State was likely to prevail it would be in the State's best
interest to settle the protest through the accelerated purchase of chairs. In
the absence of a settlement, ADEQ's move to its new facility would have been
delayed, incurring significant costs ($ 350,000).
We further disagree with the assertion that the Agency is presently neglecting
its duty to manage contracts well. The Report does not reflect on- going
activities initiated by this administration to improve contract management.
The Procurement Section is:
Currently drafting procedures for program staff to use in developing and
evaluating RFP's and administering contracts;
Negotiating with the University of Phoenix to adapt their seven
semester- long courses on public procurement and contracting to quarterly
seminars for in- house training; and,
Working on improving our relationship with the SPO by outstationing one
of our Contract Specialists at SPO on a six- month assignment.
FINDING IV: ADEQ'S EDP FUNCTION NEEDS MORE EFFECTIVE XMAGEMJZNT
Improving information management for better communication and decision- making
has been one of the highest priorities of this administration. ADEQ is
committed to expanding the usability of its local area network ( LAN) approach
to data management.
Eighteen months ago, ADEQ had no Department- wide system to transmit and
utilize data. No Department- wide messaging capability existed. Less than
half of our staff had dedicated personal computers ( PC's), and many were
forced to share work stations. Today, building on the foundation set by
ADEQ's Electronic Data Processing ( EDP) Committee which set the standards for
the EDP hardware configuration for the new facility:
Douglas R. Norton
August 17, 1993
Page 5
Almost all staff have dedicated PC's;
Almost all of the PC'e are part of LAN's ( with the exception of the
Flagstaff and Tucson Offices);
Field personnel have remote access capability; and,
Staff throughout the Agency are able to electronically access EPA and
other databases, and libraries.
Additionally, ADEQ has undertaken several initiatives to improve
communications and data integration, including:
Development of a facilitiee identification databaee which ties
facilities in all programs with locational data and the financial
system;
Establishment of hardware and software etandards and price lists which
are available on the central LAN;
E- Mail capabilities and acceee to EPA and other sources through
Internet ;
On- going development of relational databases in the Office of Water
Quality ( drinking water and groundwater) and the Office of Air Quality
( permits, compliance and inspections); and,
A database inventory completed in September, 1992, which identifies over
90 different databases.
ADEQ is proud of these accomplishments in building this level of capability in
a relatively short time. Unfortunately, the Report does not reflect any of
the efforts currently underway to accomplish this goal. Is our work complete?
Of course not. We readily recognize that there ia fragmentation in our
information management systems ( databases), that much additional work is
needed to make full use of the capability and that better Agency- wide
direction is necessary. We are working toward that approach and have convened
an internal and external customer advisory team to help us develop an EDP
strategic plan, policies, and define organizational roles. Experte from EPA
and other external customers will assist us in developing this plan which will
be submitted to the ADEQ Management Team for approval. We appreciate and
accept your offer to assist us in this important effort.
I believe that we have created a new paradigm on how agencies and the Auditor
General work together in order to benefit the citizens of Arizona. Your
trained management analysts have provided needed ineight into ADEQ and I look
forward to your assistance in providing greater protection to public health
and the environment through more efficient and effective implementation of
ADEQ programs.
Director /'
c: Bill Wiley, Deputy Director, ADEQ
Bill Thornson, Director, Performance Audit Division, Auditor General's
Off ice