Legislative Audit Division State of Montana Report to the Legislature Financial-Compliance Audit October 2006 For the Two Fiscal Years Ended June 30, 2006 Department of Environmental Quality This report contains two recommendations related to: (cid:23) The reasonableness of the fund balance in the Internal Service Fund. (cid:23) Compliance with federal regulations related to debarred and suspended parties. Direct comments/inquiries to: Legislative Audit Division Room 160, State Capitol PO Box 201705 06-16 Helena MT 59620-1705 Help eliminate fraud, waste, and abuse in state government. Call the Fraud Hotline at 1-800-222-4446 statewide or 444-4446 in Helena. FINANCIAL-COMPLIANCE AUDITS Financial-compliance audits are conducted by the Legislative Audit Division to determine if an agency’s financial operations are properly conducted, the financial reports are presented fairly, and the agency has complied with applicable laws and regulations. In performing the audit work, the audit staff uses standards set forth by the American Institute of Certified Public Accountants and the United States Government Accountability Office. Financial-compliance audit staff members hold degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant (CPA) certificates. Government Auditing Standards, the Single Audit Act Amendments of 1996 and OMB Circular A-133 require the auditor to issue certain financial, internal control, and compliance reports. This individual agency audit report is not intended to comply with these reporting requirements and is therefore not intended for distribution to federal grantor agencies. The Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the above reporting requirements. The Single Audit Report for the two fiscal years ended June 30, 2007, will be issued by March 31, 2008. The Single Audit Report for the two fiscal years ended June 30, 2005, was issued on March 6, 2006. Copies of the Single Audit Report can be obtained by contacting: Single Audit Coordinator Legislative Audit Division Office of Budget and Program Planning Room 160, State Capitol State Capitol PO Box 201705 Helena MT 59620 Helena MT 59620-1705 Phone (406) 444-3616 MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE Senator Joe Balyeat, Vice Chair Representative Dee Brown Senator John Brueggeman Representative Hal Jacobson Senator Jim Elliott Representative Christine Kaufmann Senator Dan Harrington Representative Scott Mendenhall Senator Lynda Moss Representative John Musgrove, Chair Senator Corey Stapleton Representative Janna Taylor LEGISLATIVE AUDIT DIVISION Scott A. Seacat, Legislative Auditor Deputy Legislative Auditors: Tori Hunthausen, James Gillett Chief Deputy Legislative Auditor Jim Pellegrini October 2006 The Legislative Audit Committee of the Montana State Legislature: This is our financial-compliance audit report on the Department of Environmental Quality for the two fiscal years ended June 30, 2006. Our report contains two recommendations concerning the reasonableness of the fund balance in the Internal Service Fund and compliance with federal regulations related to debarred and suspended parties. We thank the department director and staff for their assistance and cooperation during the audit. Respectfully submitted, /s/ Scott A. Seacat Scott A. Seacat Legislative Auditor Room 160 · State Capitol Building · PO Box 201705 · Helena, MT· 59620-1705 Phone (406) 444-3122 · FAX (406) 444-9784 · E-Mail [email protected] Legislative Audit Division Financial-Compliance Audit For the Two Fiscal Years Ended June 30, 2006 Department of Environmental Quality Members of the audit staff involved in this audit were John Fine, Geri Hoffman, Jim Manning, Sonia Powell, and Jeff Tamblyn. Table of Contents Appointed and Administrative Officials...................................................ii Report Summary....................................................................................S-1 Introduction.................................................................................................................................................1 Introduction...............................................................................................1 Background...............................................................................................1 Prior Audit Recommendations..................................................................3 Findings and Recommendations................................................................................................................5 Reasonableness of the Fund Balance in the Internal Service Fund..........5 Compliance with Federal Regulation.......................................................6 Independent Auditor’s Report & Department Financial Schedules..................................................A-1 Independent Auditor’s Report..............................................................A-3 Schedule of Changes in Fund Balances For the Fiscal Year Ended June 30, 2006.............................................A-5 Schedule of Changes in Fund Balances For the Fiscal Year Ended June 30, 2005.............................................A-6 Schedule of Total Revenues & Transfers-In For the Fiscal Year Ended June 30, 2006.............................................A-7 Schedule of Total Revenues & Transfers-In For the Fiscal Year Ended June 30, 2005.............................................A-8 Schedule of Total Expenditures & Transfers-Out For the Fiscal Year Ended June 30, 2006.............................................A-9 Schedule of Total Expenditures & Transfers-Out For the Fiscal Year Ended June 30, 2005...........................................A-10 Notes to the Financial Schedules........................................................A-11 Department Response.............................................................................................................................B-1 Department of Environmental Quality.................................................B-3 Page i Appointed and Administrative Officials Department of Richard Opper, Director Environmental Quality Tom Livers, Deputy Director Dean Rude, Chief Financial Officer John Arrigo, Enforcement Division Administrator Steve Welch, Permitting and Compliance Division Administrator Art Compton, Planning, Prevention and Assistance Division Administrator Sandi Olsen, Remediation Division Administrator Board of Environmental Term Expires Review Joe Russell, Chairperson Kalispell January 1, 2007 Heidi Kaiser Park City January 1, 2007 Kim Lacey Glasgow January 1, 2007 Don Marble Chester January 1, 2009 Bill Rossbach Missoula January 1, 2009 Robin Shropshire Helena January 1, 2009 Gayle Skunkcap Browning January 1, 2009 Petroleum Tank Release Compensation Board Greg Cross, Chairperson Billings June 30, 2007 Thomas Bateridge Missoula June 30, 2006 Frank Boucher Helena June 30, 2008 Theresa Blazicevich Stevensville June 30, 2008 Roger A. Noble Kalispell June 30, 2007 Shaun Peterson Helena June 30, 2007 Frank Schumacher Black Eagle June 30, 2006 For additional information concerning the Department of Environmental Quality, contact: Lisa Peterson, Public Affairs Coordinator Department of Environmental Quality PO Box 200901 Helena MT 59620-0901 e-mail: [email protected] Page ii Report Summary Department of We performed a financial-compliance audit of the Department of Environmental Quality Environmental Quality (department) for the two fiscal years ended June 30, 2006. This report contains two recommendations where the department could improve compliance with the federal regulations related to debarred and suspended parties and state law related to Internal Service Funds. We issued an unqualified opinion on the financial schedules contained in this report. The reader may rely on the financial information presented in the financial schedules and the supporting data on the state’s accounting system. 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 comments. Recommendation #1 We recommend: A. The department record the workers’ compensation discounts in accordance with state accounting policy. B. The department move $130,560 of workers’ compensation discount in the Internal Service Fund to the General Fund, State and Federal Special Revenue Funds.................................. 6 Department Response: Concur. See page B-4. Recommendation #2 We recommend the department’s State Revolving Fund Loan programs implement procedures to ensure it complies with federal requirements prohibiting contracting with suspended or debarred entities................................................................................ 7 Department Response: Concur. See page B-4. Page S-1 Introduction Introduction We performed a financial-compliance audit of the Department of Environmental Quality (department) for the two fiscal years ended June 30, 2006. The objectives of the audit were to: 1. Determine department compliance with applicable state and federal laws and regulations. 2. Obtain an understanding of the department’s control systems and, if appropriate, make recommendations for improvement in the internal and management controls of the department. 3. Determine whether the department’s financial schedules fairly present the results of operations for the two fiscal years ended June 30, 2006. 4. Determine the implementation status of prior audit recommendations. This report contains two recommendations to the department. In accordance with section 5-13-307, MCA, we analyzed and disclosed, if significant, the costs of implementing the recommendations made in this report. Other areas of concern deemed not to have a significant effect on the successful operations of the department are not specifically included in the report, but have been discussed with management. As required by section 17-8-101(6), MCA, we audited and are reporting on the reasonableness of Internal Service Fund type fees and fund equity balances at the department. The statute requires fees and charges for services, which are deposited into Internal Service Funds, be based upon commensurate costs. The department has one Internal Service Fund, which funds the Central Management Program and is administered by the Office of Financial Services. We reviewed the Internal Service Fund activity and determined the rates are commensurate with costs. However, the fund equity balance as reported on the state’s accounting records is not reasonable. This issue is discussed on page 5. Background The 1995 Legislature created the department as part of a reorganization of the environmental and natural resources functions of state government. The department is organized along the Page 1 Introduction functional lines of planning, permitting, enforcement, and remediation. Total full-time equivalent employees (FTE) for the department were 448.09 as of June 2006. The Planning, Prevention and Assistance Program (97.76 FTE) develops air, water, waste management, and energy plans to protect Montana’s resources. The program monitors environmental conditions, maintains data on the condition of Montana’s environment, and encourages businesses and government units to adopt environmental practices. The Permitting and Compliance Program (188.83 FTE) administers the permitting and compliance activities related to various federal and state statutes, including air quality, water quality, solid waste, hazardous waste, junk vehicle, mining, mine reclamation, public water supply, and sanitation in subdivision laws. The program reviews and assesses all environmental permit applications, prepares appropriate environmental impact documents, and inspects facilities to determine compliance with permit terms and the underlying laws and regulations. The division is also responsible for financial assurance activities relative to some of the permitting programs. The Enforcement Program (14 FTE) implements, coordinates, and tracks the department’s enforcement activities. The department has authority to enforce standards affecting emissions for air quality, handling and disposal of hazardous wastes, asbestos removal and disposal, coal mining, gravel pits, hard rock mining, construction of large powerlines, pipelines, electrical generation facilities, discharges of pollutants to surface or ground water, disposal of solid wastes, disposal of junk vehicles, subdivision development, community wastewater disposal, and public drinking water supplies. The Remediation Program (65.75 FTE) is responsible for overseeing investigation and cleanup activities at state and federal Superfund sites; reclaiming abandoned mine lands; regulating, permitting, and licensing underground storage tanks; implementing corrective actions at sites with leaking underground storage tanks; overseeing Page 2 Introduction groundwater remediation at sites where agricultural and industrial chemical spills have caused groundwater contamination. The Central Management Program (75.75 FTE) consists of the director’s office, a financial services office, and an information technology office. The director’s office includes the director’s staff, the deputy director, an administrative officer, a public information officer, a centralized legal services unit, and a centralized personnel office. The financial services office provides budgeting, accounting, payroll, internal auditing, procurement and contract management support to other divisions. The information technology office provides information technology services support to other divisions. The Petroleum Tank Release Compensation Board (6 FTE). The board oversees the Petroleum Tank Release Cleanup Fund, which reimburses eligible owners for the costs of petroleum release cleanup. Prior Audit The prior financial-compliance audit of the Department of Recommendations Environmental Quality for the two fiscal years ended June 30, 2004, contained nine recommendations. The department implemented eight recommendations and partially implemented one recommendation. The status of the partially implemented recommendation is summarized below. In the last audit report, we recommended the department develop outcome measures for the Alternative Energy System Loan Program as required by section 75-25-103, MCA. The department has developed outcome measures. However, the law also requires the department to use the outcome measures to determine the success of the program annually. The department compiled data and issued a report for fiscal year 2003-04. They did not compile data to determine the success of the program for fiscal year 2004-05 until August 2006. Since the department has now completed the requirements as outlined in state law we make no further recommendation at this time. Page 3