s
354.3
L72DSL
1989
Office of the Legislative Auditor
State of Montana
Report to the Legislature
March 1990
Financial-Compliance Audit
For the Two Fiscal Years Ended June 30, 1989
■ST4TF DOCUMENTS COLLECTION
JUL 1 6 1990
MONTANA STATE LIBRARY
1515 E. 6th AVE.
HELENA, MONTANA 59620
Department of State Lands
This report contains eight recommendations for improvement of
the department's operations. The major items addressed in this
report include:
► Spending Non-General Fund Money First
*■ Fire Suppression Funding
► Unrecorded General Fund Revenue
► Compliance with Appropriation Law includes returning
$165,476 to the General Fund
► Abandoned Mine Bureau Internal Controls
E
\
TU
89-13
Direct comments/inquiries to:
Office of the Legislative Auditor
Room 135, State Capitol
Helena, Montana 59620
MONTANA STATE LIBRARY
3 0864 0015 2392
FINANCIAL-COMPLIANCE AUDITS
Financial-compliance audits are conducted by the Office of the Legislative Auditor to deter-
mine if an agency's financial operations are properly conducted, the financial reports are pre-
sented fairly, and the agency has complied with applicable laws and regulations which could
have a significant financial impact. In performing the audit work, the audit staff uses stand-
ards set forth by the American Institute of Certified Public Accountants and the United
States General Accounting Office. Financial-compliance audit staff members hold degrees
with an emphasis in accounting. Most staff members hold Certified Public Accountant
(CPA) certificates.
The Single Audit Act of 1984 and 0MB Circular A- 128 require the auditor to issue certain
financial, internal control, and compliance reports regarding the state's federal financial
assistance programs, including all findings of noncompliance and questioned costs. This
individual agency audit report is not intended to comply with the Single Audit Act of 1984
or OMB Circular A- 128 and is therefore not intended for distribution to federal grantor
agencies. The Office of the Legislative Auditor issues a statewide biennial Single Audit
Report which complies with the reporting requirements listed above. The Single Audit
Report for the two fiscal years ended June 30, 1987 has been issued. Copies of the Single
Audit Report can be obtained by contacting:
Office of the Legislative Auditor
Room 135, State Capitol
Helena, MT 59620
MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE
Senator Greg Jergeson, Vice Chairman Representative John Cobb, Chairman
Senator Tom Keating Representative Mike Kadas
Senator Tom Rasmussen Representative Robert Pavlovich
Senator Mike Walker Representative Bruce Simon
LEGISLATIVE AUDITOR:
SCOTTA.SEACAT
LEGAL COUNSEL:
JOHNW. NORTHEY
STATE OF MONTANA
STATE CAPITOL
HELENA, MONTANA 59620
406/444-3122
DEPUTY LEGISLATIVE AUDITORS:
MARYBRYSON
Operations and EDP Audit
JAMES GILLETT
Financial-Compliance Audit
JIM PELLEGRINI
Performance Audit
March 1990
The Legislative Audit Committee
of the Montana State Legislature:
This is the financial-compliance audit report on the Department of State
Lands for the two fiscal years 1987-88 and 1988-89. Included in this report are
recommendations concerning spending non-General Fund money first, fire
suppression funding, unrecorded General Fund revenue, compliance with
Appropriation Law and Abandoned Mine Bureau internal controls. The
department's written response to audit recommendations is included at the end of
the audit report.
We thank the commissioner and his staff for their cooperation and
assistance throughout the audit.
Respectfully submitt^
Scott A. Seacat
Legislative Auditor
Digitized by the Internet Archive
in 2010 with funding from
IVIontana State Library
http://www.archive.org/details/departmentofstat1989mont
Office of the Legislative Auditor
Financial-Compliance Audit
For the Two Fiscal Years Ended June 30, 1989
Department of State Lands
Audit staff involved in the Department of State Lands audit included:
Wayne Kedish, Rebecca Dorwart, Maryrose Beasley, and Chuck Jensen.
Table of Contents
Elective and Administrative Officials iii
Summary of Recommendations v
Introduction I
Background 1
Prior Audit Recommendations 4
Spending Non-General Fund Money First 5
Fire Suppression Funding 7
Unrecorded General Fund Revenue 8
Compliance with Appropriations Law 9
State Land Equalization Payments 11
Abandoned Mine Bureau Internal Controls 12
Office of Surface Mining Project Ranking Reports 14
Employee Performance Appraisals 15
Summary of Independent Auditor's Report 18
Independent Auditor's Report 19
Schedule of Changes in Fund Balance for
the Two Fiscal Years Ended June 30, 1989 21
Schedule of Budgeted Revenue & Transfers In -
Estimate & Actual for the Fiscal Year Ended
June 30, 1989 22
Schedule of Budgeted Revenue & Transfers In -
Estimate & Actual for the Fiscal Year Ended
June 30, 1988 23
Schedule of Budgeted Program Expenditures
and Transfers Out by Object and Fund - Budget
and Actual for the Fiscal Year Ended
June 30, 1989 24
Introduction
Prior Audit
Recommendations
Findings and
Recommendations
Independent Auditor's
Report & Agency
Financial Schedules
Page 1
Table of Contents
Schedule of Budgeted Program Expenditures
and Transfers Out by Object and Fund - Budget
and Actual for the Fiscal Year Ended
June 30. 1988 25
Notes to the Financial Schedules 26
Agency Response Department of State Lands 33
Page ii
Elective and Administrative OfTicials
State Board of Land
Commissioners
Stan Stephens, Chairman
Ted Schwinden*
Nancy Keenan
Ed Argenbright*
Andrea "Andy" Bennett
Mike Cooney
Verner L. Bertelsen
April 28, 1988 through
December 31, 1988
Jim Waltermire
through April 8, 1988
Marc Racicot
Mike Greely*
Governor
Superintendent of
Public Instruction
State Auditor
Secretary of State
Attorney General
Adminlstratiye Officials
Dennis Casey
Dennis Hemmer*
James Williams
Gary Brown
Jeff Hagener
Kelly Blake
through April 3, 1989
Gary Amestoy
Randy Mosley
♦through December 31, 1988
Commissioner
Administrator
Centralized Services Division
Administrator
Forestry Division
Administrator
Land Administration Division
Administrator
Reclamation Division
Administrator
Field Operations
Page ill
Page iv
Summary of Recommendations
The listing below serves as a means of summarizing the recommendations contained in the report,
the department's response thereto, and a reference to the supporting comment.
Recommendation #1 We recommend the department spend
non-General Fund money before
General Fund money in compliance
with state law 6
Agency Response : Concur. See page 34.
Recommendation #2 We recommend the department work with
the Office of Budget and Program Planning
to develop a long range solution to funding
fire suppression costs 8
Agency Response : Concur. See page 34.
Recommendation #3 We recommend the department recognize
revenue in accordance with state account-
ing policy 9
Agency Response : Concur. See page 34.
Recommendation #4 We recommend the department deposit
$165,476 of fiscal year 1988-89 fire
reimbursement revenue in the General
Fund in accordance with state law 10
Agency Response : Concur. See page 34.
Recommendation #5 We recommend the department seek alter-
native methods to ensure the
timely distribution of the state land
equalization payment to the counties 12
Agency Response : Concur. See page 34.
Recommendation #6 We recommend the department:
A. Separate the duties of selecting
consultants, authorizing contracts,
and approving contract expenditures
in the Abandoned Mine Bureau.
Agency Response : Concur. See page 35.
Page V
Summaiy of Recommendations
B. Establish a system to ensure adequate
review and approval of Abandoned Mine
Bureau expenditures 14
Agency Response : Concur. See page 35.
Recommendation #7 We recommend the department develop a
review process to ensure the reports
submitted to the U.S. Department of
Interior's Office of Surface Mining
Reclamation and Enforcement are accurate 15
Agency Response : Concur. See page 35.
Recommendation #8 We recommend the department comply
with state policy requiring annual
performance appraisals of all perma-
nent employees 15
Agency Response : Concur. See page 35.
Page vi
Introduction
Introdaction
We performed a financial-compliance audit of the Department
of State Lands (the department) for the two fiscal years ended
June 30, 1988 and 1989. The objectives of the audit were to:
1. Determine if the department complied with
applicable laws and regulations.
2. Review the adequacy of the management
information systems and make recommendations for
improvement in the department's administrative and
accounting controls.
3. Determine if the department's financial schedules
present fairly the results of its operations for the
two fiscal years ended June 30, 1988 and 1989.
4. Determine the implementation status of prior audit
recommendations.
This report contains eight recommendations to the department.
These recommendations address areas where the department can
improve its control systems, financial reporting, and compliance
with laws and regulations. Other areas of concern deemed not
to have a significant effect on the successful operations of the
department are not included in this report but have been dis-
cussed with management.
In accordance with section 5-13-307, MCA, we analyzed and
disclosed the costs, if significant, of implementing recom-
mendations.
Background
The Department of State Lands was created in 1927 and was
reorganized in its present form by Chapter 529, Laws of 1981.
The Board of Land Commissioners is constitutionally created to
act as the department head. The board consists of the Governor,
the Superintendent of Public Instruction, the State Auditor, the
Secretary of State, and the Attorney General. The land
commissioner is appointed by the Governor, subject to Senate
approval; and, under the direction of the Board of Land
Page 1
Introdoction
Commissioners, serves as the chief administrative officer of the
department.
The department is responsible for the care, management, and
disposition of state lands. The department collects and receives
all moneys payable to the state as fees, rentals, royalties,
interest, penalties or payments on mortgages, purchases, or
leases of lands administered by the department.
The department employed between 298 and 306 FTE, and spent
$17,659,170 and $28,163,885 during fiscal years 1987-88 and
1988-89, respectively. Budgeted expenditures in fiscal year
1988-89 increased due to fire suppression costs incurred during
the 1988-89 fire season. Total budgeted revenue during fiscal
years 1987-88 and 1988-89 was $45,032,000 and $43,940,000,
respectively.
The department's activities are organized under five divisions,
each headed by an administrator:
Centralized Services Division - performs the overall admin-
istrative services for the department. The division processes
trust income received from surface and subsurface leases
for school trust funds. Other responsibilities include
administration of grants from the U.S. Office of Surface
Mining Reclamation and Enforcement and the U.S. Forest
Service. The division administers the department's aviation
operation and coordinates the department's data processing
activities.
Land Administration Division - responsible for the
appraisal and classification of all state lands. The division's
objective is to obtain the greatest revenue for the trust
funds commensurate with the preservation of the land. The
division also administers mineral leases for school trust
funds.
Reclamation Division - regulates all mining-related surface
disturbances in the state.
Forestry Division - responsible for state trust lands which
are principally valuable for timber, for the growing of tim-
ber, or for watershed protection. The division provides for
fire suppression efforts on state and private lands.
Page 2
Introduction
Field Operations Division - responsible for operations
carried out in the various field and land offices throughout
the state. Operations in the field offices include forestry
and land management tasks.
Page 3
Prior Audit Recommendations
Prior Audit The financial-compliance audit of the Department of State
Recommendations Lands for the two fiscal years ended June 30, 1987, contained
six separate recommendations directed to the department. We
reviewed the status of these recommendations and found the
department implemented five recommendations and partially
implemented one recommendation. The recommendation
partially implemented relates to fire suppression funding as
discussed on page 7.
Page 4
Findings and Recommendations
Spending Non-General
Fund Money First
The department jointly funds its Central Management and Slash
Disposal programs with General Fund and Special Revenue
Fund moneys. According to section 17-2-108, MCA, "the
department shall apply expenditures against non-general fund
money wherever possible before using the General Fund
Appropriation." The department could have reduced its General
Fund expenditures and used funds available in the Special
Revenue Fund to finance both its Central Management and
Slash Disposal programs.
The department receives reimbursement from the federal
government for indirect costs incurred in administering federal
grants and contracts. It receives an amount based on actual
grant expenditures multiplied by a fixed rate negotiated with the
federal government and records the indirect cost reimbursement
revenue in a Federal Special Revenue Fund. The department
uses the indirect costs collected along with General Fund money
to fund the costs of the Central Management Program.
During the 1988-89 biennium, the department received more
indirect cost reimbursement revenue than anticipated. Fund
balance in the indirect cost reimbursement account was $94,958
at the end of fiscal year 1988-89. The fund balance resulted
from the department collecting more indirect cost revenue than
it expended over the last three years. Department personnel
indicated they accumulated the indirect cost revenue rather than
reverting to the General Fund to protect any future reduction of
federal indirect costs which could cause layoffs of staff in the
Central Management Program. Department officials indicated
they decreased its General Fund and increased its Special
Revenue Fund budgets for the 1990-1991 biennium to reduce
the excess fund balance in the Special Revenue Fund.
The department also collects a fee from loggers to ensure they
clean up their logging site and reduce the hazard of forest fires.
The money collected is referred to as slash funds. The
department holds 96 percent of the fee on deposit in the Agency
Fund. When the logging area is sufficiently cleaned up, the
Page 5
Findings and Recommendations
deposit is returned to the logger. The department deposits the
remaining 4 percent in the State Special Revenue Fund and uses
it to administer the slash program. Historically, the 4 percent
collected was not sufficient to cover the costs of the program.
The department uses General Fund moneys to make up the
difference.
In fiscal year 1988-89, the fund balance in the slash disposal
account was $157,935. This fund balance resulted from the
department collecting more slash revenue than it expended from
the Special Revenue Fund over the last several years.
Department personnel stated they intend to use the additional
money to finance increased workload in the slash program. The
department has decreased the General Fund and increased the
Special Revenue Fund budgets for the 1990-91 biennium to
reduce the excess fund balance in the Special Revenue Fund.
While the department is in violation of section 17-2-108, MCA,
it has taken action to reduce the excessive fund balances in the
Special Revenue Fund. Therefore, we do not recommend the
department repay the general fund. The department should
monitor its Special Revenue Fund budgets in the future and
decrease General Fund expenditures whenever revenues exceed
expenditures or whenever there is a year-end fund balance in
the Special Revenue Fund.
Recommendation #1
We recommend the department spend non-General Fund
money before General Fund money in compliance >vith
state law.
Page 6
Findings and Recommendations
Fire Suppression The department's responsibilities include fire suppression on
Funding state and private lands. Because of the unpredictable nature of
fires, it is difficult to budget fire suppression costs. The
department pays the obligations incurred to control fires out of
its General Fund budget. If the budget is not sufficient, the
department must then request approval from the legislature for
supplemental appropriation to fund the costs incurred in
fighting the fires. This arrangement functions adequately
during the first year of the biennium since appropriation laws
authorize transfer of spending authority from the second year of
the biennium to the first without a supplemental appropriation.
During the second year of the biennium, the department must
request that the legislature grant a supplemental appropriation
for payment of any unanticipated fire suppression costs incurred
by the department during the biennium.
If during the second year of a biennium the fire season starts
early and the legislature has adjourned, the department cannot
obtain the necessary supplemental appropriation and may not
have sufficient General Fund appropriation authority to pay for
its fire operations. The department is forced to either hold its
fire suppression bills until it receives supplemental appropriation
authority or break the law and pay the bills when it does not
have the authority to do so. During the fiscal year 1988-89 fire
season when several fires broke out on state and private lands,
the department was forced to break the law. The legislature was
not in session so the department asked for and received an
emergency appropriation of $11,465,224 from the governor to
cover the fire suppression expenditures. Later, the attorney
general concluded the governor did not have the authority to
grant the appropriation since the only revenue for repayment
would be a future general fund appropriation. During March of
the 1989 legislative session, the department was subsequently
granted a supplemental appropriation of $12,639,542 in House
Bill 301 and the costs incurred during the summer of 1988 were
charged to the lawful appropriation in May 1989.
Page 7
Findings and Recommendations
In an attempt to solve the fire suppression funding issue, the
department did draft and present legislation to the 1989
Legislature, House Bill 361, allowing the Office of Budget and
Program Planning to approve additional spending authority to
pay the reasonable and necessary fire suppression costs and
expenses incurred by the Department of State Lands. The
legislature did not approve this bill.
Based on the events of the fiscal year 1988-89 fire season and
recommendations made in the last three audit reports, we
believe the department must investigate an alternative and long
term method of funding fire suppression. We suggest the
department work with the Governor's Office of Budget and
Program Planning to find a funding source to build a reserve
fund for payment of future fire suppression costs. Eventually,
the department could build a large enough reserve fund to
replace the General Fund as the source of all fire suppression
funding.
Recommendation #2
We recommend the department work with the Office of
Budget and Program Planning to develop a long range
solution to funding fire suppression costs.
Unrecorded General
Fond Revenue
State firefighters assist the federal government in fire
suppression during the summer months. The state incurs costs
that are subject to federal reimbursement. To obtain
reimbursement, it is necessary for the Forestry Division to
prepare and send a billing statement to the U.S. Forest Service.
The agreement between the U.S. Forest Service and the
department states the department will bill the U.S. Forest
Service on an annual basis. In our prior audit report, we
reported the department failed to bill the U.S. Forest Service for
$156,009 of fiscal year 1986-87 expenditures until fiscal year
Page 8
Findings and Recommendations
1987-88. This untimely billing resulted in unrecorded General
Fund revenue in fiscal year 1986-87.
In fiscal year 1987-88, the department did not accrue Fire
Suppression Reimbursement (CFDA #10.999) revenue of
$175,894 for fire suppression costs incurred. Instead the
department recorded the amounts received for fiscal year 1986-
87 and 1987-88 fire suppression reimbursement as a prior year
revenue adjustment in fiscal year 1988-89 when it received the
reimbursement. State accounting policy states "where expend-
itures have been recorded but the reimbursement has not been
received by fiscal year-end, the amount of the reimbursement
should be accrued."
Since the department did not accrue the fire reimbursement
revenue. General Fund revenue is understated $175,894 and
prior year revenue is understated $156,009 in fiscal year 1987-
88. Prior year revenue is overstated $331,903 in fiscal year
1988-89. The department did accrue $1,161,926 of 1988-89 fire
suppression reimbursement revenue before fiscal year-end.
Recommendation #3
We recommend the department recognize revenue in
accordance with state accounting policy.
Compliance with Appro-
priations Law
The department receives a Fire Suppression Reimbursement
(CFDA #10.999) for costs incurred by the state when helping
the U.S. Forest Service in suppressing fires on federal land. The
department has historically recorded both the expenditures and
reimbursements in the General Fund. However, in fiscal year
1988-89, the department recorded $996,450 of the reimburse-
ment in the General Fund and the remaining $165,476 in a
federal special revenue fund.
Page 9
Findings and Recommendations
Department officials explained House Bill 100 from the 51st
Legislative Session gives the department $100,000 of special
revenue fund authority in each fiscal year 1989-90 and fiscal
year 1990-91. The funding for the special revenue fund
appropriation comes from the fire reimbursement revenue and is
intended to allow the department additional expenditure
authority for normal forestry operations when its original
authority may have been expended in fighting fires. The
department deposited part of the reimbursement revenue in the
special revenue fund in fiscal year 1988-89 to ensure cash would
be available in fiscal year 1989-90 for the expenditures.
We do not believe House Bill 100 authorized the department to
use fiscal year 1988-89 General Fund revenue. The provision of
HB 100 which authorizes the department to receive and expend
up to $100,000 in each year of the 1990-91 biennium does not
authorize the use of fiscal year 1988-89 fire reimbursement
revenues in the 1990-91 biennium and in fact was not in effect
when the reimbursements in question were earned. Therefore,
the department had no authority to withhold the $165,476 of
fiscal year 1988-89 General Fund revenue to fund activities in
fiscal years 1989-90 or 1990-91. This error results in General
Fund revenue being understated $165,476 and federal special
revenue fund revenue being overstated $165,476 in fiscal year
1988-89. The department stated funding the appropriation with
fiscal year 1989-90 or 1990-91 revenue would be difficult since
the department bills the fire reimbursement so late in the year,
no cash would be available to fund the expenditures. We believe
the department can obtain an inter fund loan to finance the
work until the department receives the reimbursement revenue.
Recommendation #4
We recommend the department deposit $165,476 of fiscal
year 1988-89 fire reimbursement revenue in the General
Fund in accordance with state law.
Page 10
Findings and Recommendations
State Land Equalization State law requires the state to reimburse counties in which the
Payments state owns greater than 6 percent of the land area of the county
for lost property tax revenues. Each year the Department of