EPA's Changing Budget Process: Opportunity for Improved Financial Management

EPA Office of Inspector General

EPA's Changing Budget Process: Opportunity for Improved Financial Management

INTRODUCTION

PURPOSE

Unfortunately, financial accounting information to date has not always been reliable enough to use in federal decision-making or to provide the requisite public accountability for the use of taxpayers' money. Good information on the full cost of federal operations is frequently absent or extremely difficult to reconstruct...The good news is that tools are now being put in place that promise to get the federal government's financial house in order.

Charles A. Bowsher
Comptroller General of the United States
April 23, 1996

The direction of today's Federal Government is toward improved financial management. The Federal Government is fundamentally changing the way it manages the public's resources. Recent legislation has provided for improved quality of financial information. This legislation will improve the link between budget and accounting information. The chief benefit of improving this linkage will be the increased reliability of the data on which management and budgetary decisions are made.

The overall purpose of the audit was to determine if the Environmental Protection Agency's (EPA) budget and related cost information for personnel resources represented planned and actual use. This report consolidates the findings of five regional and two program office reviews and incorporates the findings from the report issued July 9, 1996, titled Budget Process: The Activity Structure. (Appendix I lists the reports, report dates, and office locations.)

BACKGROUND

Recent congressional actions have responded to the need for fundamental changes in the financial management of the Federal Government. The Chief Financial Officers Act of 1990 provided for improved financial management and internal controls to assure accurate, reliable, and timely financial information. In the same year, the Federal Accounting Standards Advisory Board (FASAB) was established by the Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the Comptroller General. FASAB was created to consider and recommend accounting principles for the Federal Government that will yield more useful and relevant financial information. The Government Performance and Results Act of 1993 (GPRA) will hold program managers accountable for program results and improve congressional decisionmaking by tying program budgeting and spending to results.

Annually, Congress gives EPA a budget to operate programs that protect human health and the environment. EPA derives its spending authority from 10 appropriations which enable it to carry out the missions specified in its authorizing legislation. EPA's budget is a hierarchy with multiple levels including appropriations, media (e.g., air, water quality, hazardous waste), and program elements. Program elements identify funds for specific activities; e.g., hazardous spill and site response and groundwater protection. The budget is developed at the program level by individual object class, and is the summarization of each allowance holder's budget. An allowance holder generally heads an Agency region, office, or division. Individual object classes are identified by a uniform classification system throughout the Federal Government; e.g., personnel, compensation, and benefits (personnel), travel, contracts, and grants.

National Program Managers (NPM) develop budget requests using the current year budget and prior year actual cost data for their respective programs. The Budget Division consolidates the program budget requests into the Congressional Budget Justification (CBJ). Congress then uses CBJ and other information provided by EPA to determine EPA's appropriations.

Upon the passing of EPA's appropriations law, the Agency has 30 days to provide Congress an operating plan (budget) which reflects all congressional appropriation requirements. EPA's House and Senate Appropriations Committees then approve EPA's budget. The approved budget is the financial blueprint by which EPA allowance holders operate.

Congress recognized that program needs and priorities change after it has approved the budget and provided EPA authority, through the annual appropriations act's legislative history, to reprogram (move funds from one program to another). This reprogramming authority is subject to congressional approval if the amount reprogrammed into or out of a program exceeds $500,000.

EPA's Resources Management Directives (RMDS) 2510, Planning and Budgeting, dated June 1987, and 2520, Administrative Control of Appropriated Funds, dated June 1987 and revised exposure draft dated February 1, 1995, guide EPA's budget formulation, review and execution processes. These directives describe roles and responsibilities for formulating and executing the budget and provide guidance for carrying out those roles and responsibilities.

EPA recognized the need for a more stable and fully integrated planning, budgeting, accountability, and evaluation system, and is engaged in a far-reaching effort to fundamentally change the way the Agency manages. In July 1995, EPA created a Planning, Budgeting, and Accountability (PBA) Task Force to make recommendations for such a change. EPA created this task force in response to the congressionally commissioned National Academy of Public Administration (NAPA) report, Setting Priorities, Getting Results, which stated that EPA needed to change its planning, budgeting, and accountability structure. NAPA recommended EPA redesign and improve its management operations to support its new directions in environmental protection. NAPA recommended the Agency set priorities, allocate resources through both a budget process and effective program management, ensure accountability to Agency managers and Congress, and assess the results.

On March 5, 1996, EPA announced that it would develop a new PBA system to dramatically improve the Agency's ability to manage for environmental results. The PBA system will provide information and structure for more informed decisions on environmental priorities and the strategies that can best achieve those results. The PBA system will link strategic planning, annual performance planning, budgeting, and performance reporting. This linkage will provide the Agency with the information needed to focus efforts on the highest priority environmental issues and assure efficient use of taxpayer dollars. This effort will take several years to fully implement.

The following chart illustrates EPA's $8.6 billion fiscal 1995 operating plan by major object class which includes $1.2 billion for personnel resources. Our audit primarily focused on EPA's budget processes related to personnel resources.

[EPA's

$8.6 Billion Fiscal 1995 Operating Plan Chart]

SCOPE AND METHODOLOGY

We conducted our fieldwork between May 1995 and July 1996. Our Headquarters fieldwork covered EPA's budget processes for fiscal 1994 and 1995.

We interviewed responsible Agency officials in the Office of Administration and Resources Management (OARM), the Office of Air (OAR), and the Office of Water (OW), in Washington, D.C. We reviewed applicable laws, regulations, directives, and other Agency guidance. We reviewed various documents given to us related to the Agency budget processes and activities, including workload models, and PBA system announcements and task force reports.

We obtained and analyzed resource information (both budgeted and actual cost) from EPA's accounting system, the Integrated Financial Management System (IFMS). However, we did not assess the reliability of the computer processed data from the accounting system and related reporting system (the Management and Accounting Reporting System), since the assessment is made as part of the audit of the Agency's financial statements.

We obtained a download of all Agency reprogramming transactions for the audit periods and analyzed those reprogrammings which individually met the congressional reprogramming requirements.

We performed our audit in accordance with Government Auditing Standards (1994 revision) for performance-related audits issued by the Comptroller General of the United States. The findings in this report include control weaknesses identified during the audit and our recommendations to correct the weaknesses, when appropriate. No other issues came to our attention which we believed were significant enough to warrant expanding the audit scope.

We consolidated the findings of the five regional and two program office reviews and incorporated the findings from the report issued July 9, 1996, titled Budget Process: The Activity Structure. (Appendix I lists the reports, report dates, and office locations.)

PRIOR AUDIT COVERAGE

Office of Inspector General (OIG) and the General Accounting Office have not issued audit reports in this area prior to this nationwide audit.

CHAPTER 2

EPA HAS AN OPPORTUNITY TO MAKE NEEDED IMPROVEMENTS IN BUDGET PROCEDURES

EPA's budget practices and procedures were generally effective at the appropriation level and ensured that EPA complied with the statutory requirements for funds control. However, a pattern of errors in EPA's budget practices and procedures indicated that budget and cost information for program level personnel resources was not valued as useful information and did not ensure that EPA complied with congressional intent. Regional personnel resource budgets did not always reflect planned use. Reprogramming errors

At the core of every decision made by the Agency is the need for timely, accurate, and meaningful information.

EPA CFO
Strategic Plan for
Resources Management
March 21, 1996

diminished the usefulness of program budget information. Regional personnel costs were inaccurately accumulated and reported. The usefulness of EPA's budget structure is hampered by inconsistently defined program elements. As a result, Agency managers relied on inaccurate information in developing budget requests. Further, EPA had no documentation to support that Congress was notified of funds held in reserve for contingencies. Given the change in focus of the financial environment in the Federal Government, EPA needs to make changes in its budget practices and procedures to emphasize and ensure the development and reporting of accurate and reliable program level budget and cost information.

A recent EPA initiative, development of the PBA system, is addressing budget process improvements. The PBA system initiative is being developed to better link long-term environmental planning with budget and accountability systems. This initiative presents the Agency with an opportunity to fundamentally change the way it plans, budgets, accounts for, and manages activities performed. The Agency has recognized that two critical elements to the PBA system's success are delegating performance and accountability throughout all levels of the Agency and obtaining employee buy-in.

REGIONAL PERSONNEL RESOURCE BUDGETS DID NOT ALWAYS REFLECT PLANNED USE

EPA's regional personnel resources in the Agency's approved budget did not always reflect planned use. Regions did not reprogram personnel resources in their portion of the Agency's budget. Further, EPA used outdated workload models to allocate personnel resources to the regions. As a result, the regional workyears and personnel funds were misstated in the Agency's budget approved by Congress. NPMs then used the misstated budget information to develop future budget requests.

The regions did not adjust their budgets to reflect planned use of workyears prior or subsequent to congressional approval of the budget. Workyears are used as the basis of the allocation of personnel funds. Regional representatives said NPMs and budget division representatives discouraged reprogramming workyears and thus feared the region would lose workyears in total if the region reprogrammed them. Budget Division representatives indicated that Congress is concerned with level of effort and has purview over dollars, not workyears, and were thus not concerned with the reprogramming of workyears.

EPA distributed regional program workyears using outdated workload models. EPA froze workload models in 1987, and for the last 8 years prorated the 33.3 percent increase in workyears using the workyear level for the prior year as the base. EPA froze the workload models in 1987, because each year the Agency spent an inordinate amount of time negotiating the distribution of marginal workyear increases. As workload models were not revised, they became outdated and could not be used to equitably distribute regional workyears.

EPA budget directives provide guidance on allocating workyears to the regions in developing the Agency budget. RMDS 2510, Chapter 2-2 states that EPA's budget justification is written at the program level and not broken out by region. EPA then prepares the regional distribution, using workload models, to develop the Agency budget. EPA's structure requires some rational method for deciding precisely how to equitably distribute workyears and funds among the regions.

OARM did not use workload models to distribute regional workyear changes from each prior year. Although OARM said it had used workload models in prior years, it had no documentation of 9 of its 10 workload models and could not have used its workload models for regional distributions. Also, in 1995, OARM did not develop a workload model for distributing 36 workyears funded under the Regional Support Services program. These workyears were converted from the non-ceiling stay-in-school and intergovernmental personnel agreement (IPA) workyears to permanent workyears. The Budget Division distributed the entire 36 workyears to Region 9, reasoning that Region 9 was the only region using IPAs. No workyears were distributed to the regions that had stay-in-school positions, and Region 9 only used 15 of the 36 workyears in fiscal 1995.

EPA's distribution of regional workyears resulted in the regions not receiving resources where they planned to use them, as evidenced by where the resources were actually used. For example, as shown in Table 1, in fiscal 1991 to 1995 the regions collectively charged more workyears to the regional management program elements for both Program and Research Operations (PRO) and Superfund than they received.

Table 1 - Fiscal 1991 to 1995 Regional Management Workyears
Comparison of Budget to Actual Usage

Year	PRO Workyear Budget	PRO Workyear Actual Use	Difference Over -Under	Superfund Workyear Budget	Superfund Workyear Actual Use	Difference Over -Under	Total Workyear Budget	Total Workyear Actual Use	Difference Over -Under
1991	199	246	47	68	97	29	267	343	76
1992	203	238	35	70	107	37	273	345	72
1993	195	258	63	70	91	21	265	349	84
1994	200	250	50	68	90	22	268	340	72
1995	252	269	17	64	89	25	316	358	42

The allocation of regional management program workyears among the regions did not reflect each region's needs as evidenced by their fiscal 1995 actual usage, as shown in Table 2. The regional differences between budget and actual use show that program resources did not appear to be distributed to the regions based on need. For example, Region 9 was allocated 30 of the PRO regional management workyears and only used 20, while Region 6 received only 20 workyears and used 34.

Table 2 - Fiscal 1995 Regional Management Program Workyear Usage

Region	PRO Workyear Budget	PRO Workyear Actual Use	Difference Over -Under	Superfund Workyear Budget	Superfund Workyear Actual Use	Difference Over -Under	Total Workyear Budget	Total Workyear Actual Use	Difference Over -Under
1	30	36	6	5	6	1	35	42	7
2	25	32	7	9	14	5	34	46	12
3	34	28	-6	8	13	5	42	41	-1
4	26	29	3	7	16	9	33	45	12
5	22	28	6	11	10	-1	33	38	5
6	20	34	14	4	9	5	24	43	19
7	22	19	-3	6	5	-1	28	24	-4
8	22	21	-1	4	6	2	26	27	1
9	30	20	-10	6	5	-1	36	25	-11
10	21	22	1	4	5	1	25	27	2
Total	252	269	17	64	89	25	316	358	42

EPA recognized the regional distributions were outdated due to the significant shifts in regional workloads and revised the Agency's five highest priority workload models for the fiscal 1996 distribution. We reviewed three of the revised workload models and found two contained methodology weaknesses which could bias the distributions. The workload models reviewed were Wastewater Management and Technology; Superfund Contracts, Grants, and Small Purchases; and Water Quality Financial Assistance. The Wastewater Management and Technology workload model did not contain apparent biases.

The revised Superfund Contracts, Grants, and Small Purchases workload model contained methodology weaknesses in the activities included in the model and the estimated resource requirements for those activities. The workgroup which developed the model did not do a review of program requirements to develop the base level activities to be included in the model. A base review of the program requirements could have identified other activities which should have been included in the model.

The revised model did not use actual data to develop estimates of resource requirements for each activity. The use of actual data would identify inconsistencies among similar tasks. As an example, one region noted that the model allowed 60 hours for an enforcement work assignment and only 30 hours for a similar remedial work assignment. While slight differences may exist between the enforcement and remedial work assignment tasks, the difference should not warrant twice the time requirements. Further, this region did not believe that 30 hours for a remedial work assignment was sufficient.

The workgroup did not consider non-productive time in estimating workyear needs, thus underestimating the actual workyears required to accomplish each task. The model equated a workyear to 2080 productive hours and did not consider non-productive time such as annual leave, sick leave, and training. As a result, actual workyear needs were underestimated. The use, and periodic comparison, of actual to estimated workyears would highlight workload model weaknesses of this type.

The revised Water Quality Financial Assistance model distributions may be biased toward regions which do not complete projects. The revised workload model allocated workyears using the quantity of each activity for the whole program rather than the quantity to be performed in the current year. For example, the Construction Grants Program category was calculated based on the number and value of projects remaining in the program rather than the number and value of projects planned or expected to be worked on during the fiscal year. As a result, distribution resulting from this portion of the workload model could provide a disincentive for completing projects.

REPROGRAMMING ERRORS DIMINISHED THE USEFULNESS OF PROGRAM INFORMATION

The Budget Division had comprehensive reprogramming procedures. However, EPA's reprogramming procedures did not require NPM notification for changes to program budgets for which the NPM had overall responsibility. Further, we noted several errors in implementing the 1994 and 1995 reprogrammings. Reprogramming justifications did not consistently identify the program impact on the losing program. Regions monitored personnel resources at the appropriation level rather than the program level. EPA did not obtain required congressional approval of one fiscal 1994 reprogramming. These errors diminished the usefulness of the related program information.

NPMs Did Not Believe They Were Provided Timely Access to Changes in Program Budgets

The Budget Division's reprogramming procedures only required the review and approval by a Budget Division Approval Official, and did not require that the responsible NPM, who has overall responsibility for the program, be notified of the reprogramming action. Budget Division analysts, at their discretion, notified the appropriate NPM of the reprogrammings. One NPM stated the lack of involvement in this process made it difficult to estimate, justify, and defend program budget information before Congress.

The failure to consistently notify NPMs of reprogrammings magnified the NPMs' belief that they did not have timely access to program budget information for program funds allocated to other allowance holders. NPMs had responsibility for managing their respective programs, as well as requesting and defending the budgets; yet, they did not believe they had timely access to changes in the portion of their program budgets allocated to other allowance holders. For example, the OW NPM was allocated 3.8 percent of the initial fiscal 1995 budget for water programs. The remaining 96.2 percent of the water programs budget was allocated to other allowance holders; e.g., Office of Research and Development, regions, and reserves. The OW NPM budget representatives believed they did not have ready access to budget information for this 96.2 percent of the water budget.

Budget Division representatives indicated that appropriate NPM representatives can and did have access to all budget information including other allowance holders' changes to their budgets. However, the Budget Division did not communicate this access to the NPMs or provide information on how to access the information. NPMs believed they could only receive the reprogramming information from the Budget Division; however, the NPM representatives found this process to be cumbersome and time-consuming.

Program Impact Was Not Always Required For Approved Reprogrammings

The Budget Division did not always require the identification of the program impact for approved reprogrammings. Revised draft RMDS 2520, Chapter 3-II states that an important factor in whether or not a reprogramming is approved is the written justification. According to the directive, this justification provides the permanent audit trail of EPA's resources and protection for the initiator whose rationale is documented. The justification should state what the action is buying for the receiving program or office and what the impact is for the losing program or office. Information on the impact to both the receiving and losing program or office is essential for informed decisionmaking. The program impact for 93 percent of the fiscal 1994 and 79 percent of the fiscal 1995 reprogrammings sampled identified, in IFMS, what the action was buying for the program or office receiving the resources. (See Attachments 1 and 2.) However, none of these reprogrammings identified, in IFMS, the impact for the program or office losing the resources. The Budget Division had approved each of these reprogrammings. Reprogrammings which did not properly identify the impact for the losing program or office should not have been approved. The program impact on both the receiving and losing program was generally identified for reprogrammings included in congressional reprogramming packages.

The Budget Division has recognized this problem and taken steps to correct it. In the June 25, 1996 Advice of Allowance Letter, the Budget Division Director required NPMs and Senior Budget Officials to specifically identify the use of funds in the gaining program and the impact on the losing programs or the reprogramming would not be approved. The Budget Division approval of reprogrammings will be contingent on complete, clear, and descriptive purpose statements.

Personnel Funds Were Monitored At The Appropriation Level Rather Than At The Program Level

Regions monitored personnel funds at the appropriation level rather than the program level and waited until the end of the year to reprogram personnel funds to cover program over-obligations. IFMS was set up to lock out improper spending at the appropriations level rather than the program level. Revised draft RMDS 2520, Chapter 3 required that all allowance holders were responsible for monitoring their obligations at the program level and reprogramming funds, when needed, in advance of commitments and obligations. The regions monitored personnel funds at the appropriation level and overspent personnel resources for some programs and underspent for others. At the end of the year, the regions reprogrammed personnel resources to reflect actual spending. End of year reprogramming of personnel resources circumvented the reprogramming requirement to ensure program funds were available prior to the commitment and obligation of those funds. Further, the effect of the end of year reprogrammings was not reflected in the current budget data used by NPMs to develop future program budgets.

Congressional Approval Was Not Obtained For A Fiscal 1994 Reprogramming

The Budget Division did not obtain required congressional approval for one fiscal 1994 reprogramming. In fiscal 1994, the Budget Division processed approximately 3,500 reprogramming transactions, and 14 of these reprogramming transactions individually met the congressional reprogramming approval requirement.

The Budget Division did not obtain required congressional approval for 1 of the 14 fiscal 1994 reprogrammings. The fiscal 1994 reprogramming moved $730,000 of Region 2 personnel resources from the Hazardous Substance (Superfund) Technical Enforcement program to administrative funds for the Hazardous Substance (Superfund) Regional Support Services program. Region 2 initiated this reprogramming in August 1994 to cover the costs of its Edison Laboratory. The shortfall in the Superfund support account appeared to be a recurring problem. Budget Division representatives stated that the failure to obtain congressional approval was an oversight.

Also, the Budget Division was unable to provide a crosswalk of the approved congressional reprogramming packages to the actual reprogramming transactions. Congress provided oral approval of reprogramming packages. A congressional reprogramming package describes the Agency's requests and justifications to move funds among programs and may include more than one reprogramming. The Budget Division did not maintain a written crosswalk of the congressionally approved reprogrammings to the actual reprogramming transactions in IFMS. A written crosswalk would provide a permanent trail linking the congressional approval to the actual reprogramming transactions.

Additionally, EPA interprets reprogramming authority to apply to distinct actions rather than the cumulative effect of individual similar actions on a program. Revised draft RMDS 2520, Chapter 3-II addresses EPA's interpretation of the reprogramming approval requirements and states:

Through verbal negotiations with our Appropriations Committees, it is understood that the limitation is not cumulative for the year, but applies incrementally to reprogramming activities undertaken for a specific purpose. EPA has been directed to notify the Appropriation Committees prior to each reprogramming of funds in excess of the limitation between programs (media) or program elements.

An example of EPA's application of this interpretation would be an OARM reprogramming of $600,000 within the Office of the Comptroller from the Hazardous Substance Financial Management Headquarters program element to the Hazardous Substance Headquarters Nationwide Support Services program element. The funds were reprogrammed to realign resources to support IFMS operations and maintenance; Management and Accounting Reporting System enhancements; and Combined Payroll Redistribution and Reporting System operations, maintenance, and enhancements. The Budget Division considered each item in the stated reprogramming purpose as a separate and distinct action and thus did not obtain congressional preapproval for the reprogramming.

To ensure EPA's policies and procedures comply with congressional guidelines, and given the continual changes in congressional membership, EPA should periodically notify Congress of this agreement and document this notification.

REGIONAL PERSONNEL COSTS WERE INACCURATELY ACCUMULATED

The Agency's implementation of recent IFMS updates and changes in Agency directives increased the accuracy of personnel resource costs. However, we noted significant errors in two of five regions' charging of personnel costs which caused the misstatement of reported program level personnel costs. The misstated program cost information was used to develop subsequent program budgets.

Program Level Personnel Costs Were Mischarged

The five regions we reviewed did not always correctly

Since PC&B (personnel resources) is such a critical expense in the management of resources, controlling it carefully is vital.

Revised draft
RMDS 2520, Chapter 4

charge workyears and personnel costs to the program element which directly supported the employee's activities. The five regions charged environmental programs for management and support activities; however, the mischarging in three of five regions was not significant to the regions' budgets. In fiscal 1994, Regions 4 and 7 mischarged more than 41.7 workyears and $2.1 million, primarily charging management and support costs to environmental programs. In fiscal 1995, Region 4 also mischarged 21.6 workyears and $1.06 million. (Due to the timing of the fieldwork, Region 7's fiscal 1995 charges were not included in the scope of our review.) Possible incorrect charging of management and support costs to environmental programs also was indicated in four of the five regions we did not review.

EPA provides program descriptions to Congress as part of its annual budget justification. The program descriptions identify for each program the authorizing legislation, program activities, and goals and objectives for which EPA requests funding. EPA's portion of the President's budget is written to the program level and includes justifications for the funds requested. The program descriptions and budget justifications identify, for Congress, the types of activities that EPA plans to perform with the funds requested and are used by EPA's allowance holders to identify the program which benefits from an employee's efforts. Allowance holders use this information to determine where the personnel costs of each employee should be charged.

Regions 4 and 7 supplemented their allocations of management and support workyears with environmental program workyears. Both regions used environmental workyears to provide additional workyears for such activities as congressional liaison, public affairs, grant specialists, and information management specialist supervisor. Region 7 did not routinely change an employee's funding designation when the employee was permanently transferred or detailed from one office to another, thus charging the employee's personnel costs and workyear to the wrong program.

A specific example of supplementing management and support workyears was one region's charges of the cost of an information management specialist supervisor to the Air Quality Management Implementation program. The information management specialist supervisor oversaw the regions' information resource division. The activities performed in this division included maintaining, supporting, and purchasing mainframe and personal computers, providing telecommunication and local area network administration, and maintaining the library, distribution system, and graphics department. The information management specialist supervisor's time should have been charged to the Administrative Management-Region program element, a management and support program; not the Air Quality Management Implementation program element, an environmental program.

In this example, EPA requested funding for an Air Quality Management Implementation workyear and related personnel costs. EPA described, for Congress, activities to be performed in the Air Quality Management Implementation program which did not include maintaining a regional information resource division, and received a workyear and funding for the Air Quality Management Implementation program. However, EPA used the workyear and related funding for a supervisor information resource specialist who oversaw the region's information resources division.

Regional management and support costs were understated and regional environmental program costs were overstated as a result of the mischarging. Furthermore, EPA management did not detect the misstatement because it did not compare regional program costs and performance to planned use. Regional performance plans, where prepared, did not include budget and program costs. Because performance plans were not prepared for regional management and support functions, the significant misstatement of two regional management and support cost categories included in our review went undetected.

Regions Could Not Provide Support For Allocation of Personnel Resource Costs

The regions did not always have support for their allocations of workyears and related personnel costs among programs. Three of our five regional reviews addressed regional workyear allocations. One region had adequate documentation supporting its basis for allocating the personnel costs of appropriate employees in management and support offices to environmental programs. The region was able to demonstrate that the employees, while physically located in an administrative or support office, performed work covered under an environmental program.

One region did not have support for its allocation of personnel costs among environmental programs for laboratory support services and technical initiatives. Since these services benefitted a number of programs, the cost for personnel services should have been allocated in some equitable manner to the benefitting programs. Various allocation bases could have been used, such as time expended or number of analyses performed. The objective is to match the cost with the benefit received by the program.

Another region had not documented its basis for charging management and support personnel costs to specific program elements and appropriations. This region charged 100 percent of the personnel costs of certain employees to specific administrative and/or environmental program elements rather than allocating the personnel costs among the regional programs which benefitted from the employees' efforts. The region considered it more cost effective to charge employees to a specific program element, even though 100 percent of their work might not have been related to the program element. The region contended that personnel costs of these employees, in turn, would offset the personnel costs of several employees who performed work related to the program element but were charged to other program elements. The region had no analysis or historical basis to document that the actual workload averaged out among all employees. The region also did not take advantage of the IFMS system capability of automatically allocating an employee's time among three program elements.

USEFULNESS OF EPA'S BUDGET STRUCTURE IS HAMPERED BY INCONSISTENCIES

EPA attempts to provide program cost information through the budget structure. However, the realities of the budget process led to inconsistencies in the budget structure and diminished the comparability of program budget and cost information. The budget structure is complex and has been hampered by the inconsistent creation of program elements. Further, the current budget structure cannot efficiently capture the information required to implement GPRA as the activities, for which goals and related measures are being proposed, are not always equivalent to existing program elements. The Agency recognized this and is working on plans to restructure the program elements. EPA plans to accomplish this restructuring as a part of the new PBA system. As noted in the EPA Chief Financial Officer's June 26, 1996 letter to OMB, the preliminary milestone for the completion of the draft budget system (program element) restructuring is December 1996 and the final by September 1997. The Agency should address the following problems in the budget restructuring.

EPA has not been consistent in creating program elements among appropriations, locations, or functions. Historically, EPA used program elements to identify funds for specific programs; e.g., hazardous spill and site response, groundwater protection, and human resources. However, this use changed through the years. As interest was shown in an activity, either from an Agency official or congressional staff, a program element was created. Program elements were created to track data on customers, various locations, different programs, and functions. EPA's inconsistent creation of program elements over time reduced the consistency and comparability of budget and financial data for internal management purposes.

EPA has not developed a common definition of management and support activities to integrate information across the Agency to evaluate and monitor performance. For example, personnel resources for employees performing similar management and support activities were budgeted and charged differently, depending on the employee's physical location. EPA's definition of management and support activities performed by Headquarters and Headquarters field offices are defined by the office location of employees. Whereas EPA's definition of management and support activities for regional offices are defined by the activity performed by employees.

EPA needs to clearly define the needs of all users in tracking activities and resources, and then redesign the budget structure to capture this information. The budget and accounting structure should be flexible to assist all levels of management. The system should facilitate the capturing of budget information useful to the unit managers and have the ability to summarize data at the regional level, the program level, and the Agency level. Complete financial information for a certain location or a particular program cannot easily be developed from the current budget and accounting system. The ability to accumulate the complete cost of a particular program or location will enhance EPA's management capabilities and allow it to move forward in meeting the intent of GPRA.

DELEGATION OF PERFORMANCE ACCOUNTABILITY AND EMPLOYEE BUY-IN ARE CRITICAL TO PBA SYSTEM SUCCESS

Two critical elements to the PBA systems' success are delegating performance and accountability throughout all levels of the Agency, and obtaining employee buy-in to the new system. Measuring performance and assigning related accountability leads to improved program efficiency, effectiveness, and results. Program cost is a necessary element of measuring performance. To obtain employee buy-in, the PBA process must be useful to employees and integrated into the daily management of the Agency. The Agency has recognized the need for these critical elements and has created a PBA accountability workgroup to design this part of the system. However, the Agency will need to overcome current performance measurement practices which do not link performance and budgets.

NPMs recognized the need for accountability and developed regional performance agreements; however, these agreements do not link performance and budgets. For example, OAR annually negotiates regional performance agreements and developed a tracking system to monitor the regions' performance. However, the performance agreements and tracking system do not contain regional budget information. The OW also developed a Management Agreement (MA) for use in negotiating and evaluating regional performance. However, the MA does not link performance and resources requirements nor are the activities linked with those in the workload models. As a result, activity planning and resource allocations are still separate functions and remain unconnected and should be corrected in the PBA implementation.

The changes we make, some of which will be immediate and others which will evolve over time, will help the Agency to better determine and articulate its priorities and ensure that our resources are managed effectively.

Carol Browner
Administrator
on the PBA system
June 25, 1996

One critical element to the success of the PBA system is the delegation of financial and performance accountability to appropriate levels throughout the Agency. The PBA system should be designed to serve the needs of all EPA employees. EPA senior management should use the PBA system to communicate and delegate responsibility for Agency goals and objectives, performance plans, and accountability measures, throughout all levels of management. The system should establish financial and performance accountability at levels for which employees have the ability to respond. Employees will then see where their actions contribute to the achievement of the Agency mission.

The Agency needs to obtain general employee buy-in into the new PBA system. Employee buy-in, down to the program manager level, is essential to ensure the new PBA process fundamentally changes the way EPA manages. Absent this buy-in, the PBA system may be destined to the same fate as the Agency's initial implementation of the Federal Managers' Financial Integrity Act (FMFIA). FMFIA implementation at EPA ran into problems because it was centralized, did not have employee buy-in, and was not used in the daily management of the Agency. Employees need to understand how their actions affect the Agency's goals and objectives. Further, the PBA system should include incentives for good performance and consequences for poor performance. The existence of incentives and consequences based on program performance may encourage managers to correlate budget, cost, and performance information.

THE BUDGET DIVISION LACKED DOCUMENTATION TO SUPPORT CONGRESSIONAL NOTIFICATION OF AGENCY RESERVE FOR CONTINGENCIES

The Budget Division was unable to support that Congress was notified of the fiscal 1995 contingency reserves. In the initial fiscal 1995 operating plan, EPA held $923 million in two accounts titled EPA HQ Reserve and EPA Regional Reserve. Budget Division representatives explained these funds were reserved for potential liabilities, fiduciary or contingency needs, reimbursable authorities, and protection against potential Antideficiency Act violations. The Budget Division representatives, however, were not able to identify the funds held for each of these reasons, or support the methodology for the calculation of specific reserve amounts. Two NPMs stated in planning their budgets, they were aware a portion of their budget would be held in reserve.

We analyzed the $923 million held in reserve, and determined that $870 million was held for reserves specifically provided for by law, reimbursable authorities, or programmatic delay. By process of elimination, we calculated that $53 million was held in reserve for contingencies and as fiduciary reserves. Funds held in reserve for contingencies or fiduciary responsibilities meet the Impoundment Control Act (ICA) definition of a permitted deferral; however, the ICA requires deferrals to be reported to Congress. Of this amount, $28 million, in 11 accounts ranging from $71,000 to $6.6 million, remained in reserve at the end of fiscal 1995. Although these funds did not expire, they were not provided to program managers for use in fiscal 1995. RMDS 2520 did not address reevaluating and redistributing funds late in the fiscal year which were held in reserve for contingencies.

The Budget Division representatives were unable to provide supporting documents to indicate Congress was notified of the fiscal 1995 contingency reserves. The representatives did provide four documents of prior year correspondence between EPA and congressional staffers which contained references to the existence of reserves. However, none of the documents related to fiscal 1995 reserves. The Budget Division representatives said Congress is not specifically notified of the funds held in reserve, but congressional staffers know how much money is put in reserve through discussions with Agency personnel. The Budget Division representatives added that holding funds in reserve is a prudent management practice, common knowledge, and part of the budget process.

CONCLUSION

EPA's budget practices and procedures for personnel resources indicated that budget and cost information was not useful at the program level. Further, EPA's written policies and procedures did not directly address or emphasize the need for accurate and reliable program level budget and cost information. EPA's practices have developed over time and reflect EPA's efforts to ensure that the Agency is in compliance with the statutory requirements for funds control.

EPA recognized that timely, accurate, and meaningful program level information is a key factor in assessing program performance and has launched the PBA initiative to dramatically change the way the Agency does business. The findings in this report should be considered in the development of the PBA system initiative as EPA makes decisions regarding the future direction of its budget and related financial management activities. EPA will need to be able to answer:

What are you trying to accomplish?
How well did you do?
How do you know you accomplished what you said you did?
What did it cost?

Reliable and accurate personnel budget and cost information will be essential to answer these questions.

RECOMMENDATIONS

We recommend the Acting Chief Financial Officer (CFO):

Require regions to reprogram workyears and personnel resources to reflect planned use. Require the regions to monitor their use of personnel funds at the program level.

Advise NPMs to assess the equitability of the workyear allocations of each program. Review and revise all regional workload distributions as part of the PBA implementation and where needed thereafter. Annually distribute workyears to regions based on current workload models. Negotiate regional program performance based on these distributions. Monitor regional planned against actual performance and revise workload models based on actual results.

Require the new PBA organization to develop and issue guidance on appropriate methodologies for developing workload models. Assess whether the Superfund Contracts, Grants and Small Purchases and Water Quality Financial Assistance workload model methodology weaknesses bias distributions and correct accordingly.

Require timely notification of reprogrammings for programmatic or media reasons to the NPMs.

Communicate to NPMs that they do have access to reprogramming information for their programs and provide instruction on how to access the information.

Ensure the 1996 Advice of Allowance reprogramming guidance requiring the identification of program impact in reprogramming transactions is implemented.
Ensure that EPA obtains the required congressional approvals for reprogramming transactions.

Prepare and maintain a crosswalk of all approved congressional reprogramming packages to the actual reprogramming transactions.

Clarify with Congress that reprogramming authority applies to separate and distinct actions for the same purpose rather than the cumulative effect of individual actions.

Develop consistent definitions of program elements and develop procedures to ensure the definitions are consistently applied. Program element definitions should be consistent either by activity or physical location, but not a combination of the two. Defining program elements by activity is the preferable approach.

Identify the budgetary and financial information needs of all internal and external users. Design and structure a flexible system which meets user needs, tracks information centrally, and summarizes data.

Require regions to charge personnel costs to the program which supports the employee's activities.

Require regions to develop and document the basis for assigning and charging personnel costs to benefitting programs.

Notify Congress, in writing, of funds held in reserve which constitute a deferral, or obtain an Office of General Counsel written opinion why such a notification is not required. Document the rationale and related calculation of all funds held in reserve.

AGENCY COMMENTS AND OIG EVALUATION

The Acting CFO generally agreed with the findings and provided comments to clarify some issues. We revised sections of the report accordingly. The Acting CFO did not agree with the need to timely notify NPMs of reprogrammings for programmatic reasons, the need to prepare and maintain a crosswalk of all approved congressional reprogramming packages to the actual reprogramming transactions, and the assertion that Agency funds held in reserve for contingencies constitutes a deferral.

The Acting CFO disagreed with the need to timely notify NPMs of reprogrammings for programmatic reasons as the NPMs do not have budget execution responsibilities for funds allocated to other allowance holders. While the NPMs do not have funds control responsibilities, they have budget development and oversight responsibilities for the programs. We believe implementation of the recommendation would facilitate the management of these programs by providing timely communication of changes in the planned use of program budgets. However, the Acting CFO agreed in substance to this recommendation when she did not disagree with the NPMs' need for program budget information. The Acting CFO indicated that the NPMs did in fact have access to information on changes in program budgets; however, the Budget Division had not communicated this ability to the NPMs. We believe that directly notifying NPMs of changes in the program budgets provides the most timely and efficient communication. However, the Budget Division's communication to the NPMs of their access capabilities and instruction on how to access the information should adequately address the problem.

The Acting CFO did not agree with the need to prepare and maintain a crosswalk linking all approved congressional reprogramming packages to the actual reprogramming transactions in IFMS. The Acting CFO indicated that current procedures require the documentation of the congressional approval in IFMS. However, the current procedures only provide for this one way identification of the reprogrammings. Procedures do not require a notation of the individual reprogramming transactions in the congressional approval package. The recommendation would provide for two way identification of reprogrammings and provide the Budget Division the ability to determine if all congressionally approved reprogrammings were actually accomplished.

The Acting CFO provided additional information on reprogramming transactions which met the congressional approval limitations and we revised the report accordingly. However, we did not agree with the Acting CFO's assertion that the failure to obtain congressional approval for one 1994 reprogramming should hardly be considered material and did not delete this finding from the report.

The Acting CFO agreed with the recommendation to document the rationale and related calculation of all funds held in reserve and provided information to clarify the finding. We incorporated this information in report. However, the Acting CFO did not provide information which disproved our assertion that funds held in reserve for contingencies constitute a deferral which requires congressional notification. Thus, we recommend the Agency obtain an Office of General Counsel opinion why such a notification is not required.

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