U.S. Coast Guard
AUDIT OF THE COAST GUARD’S CIVILIAN PAY BUDGET PROCESS

Final Report
Appendix D: Chairman Rogers’ Letter
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Mr, Clark Kent Ervin
Inspector General .
Department of Homeland Security
Washington, DC 20528
Dear Mr. Ervin:

‘This letter is to request your expedited assistance in review of a Coast Guard matter for
the Subcommittee, The Committee has received two reprogramming requests this past year from
the Coast Guard that have not been adequately justified, There have been repeated discrepancies
‘about haw the Coast Guard is obligating, tracking, and nocounting for civilian pay expenses,
including, but not limited to, pay parity with respect to annual inflation, workers
-telocation costs, staffing levels, and internal controls for managing the expenditures,

For each reprogranuning, the amounts requested changed significantly from the original
-submittal, It appears as if there is very little oversight and management review of these expenses.
‘Tam requesting that the Office of Inspector General audit tho Coast Guard civilian pay expenses

gration of after and requent that you report beck ta the Subcommattes by Febraary rf

Ifyou have any questions sbout this request, please do not hesitate to contact Stephanic
Gupta of the majority staff ou (202) 225-5834,

‘Thank you for your assistance.

16


U.S. Coast Guard
AUDIT OF THE COAST GUARD’S CIVILIAN PAY BUDGET PROCESS
Final Report

4.0 Management’s Response

U.S. Department of Commandant 2100 Second Street, S.W.
Homeland Security United States Coast Guard Washington, DC 29803-0601

Staff Symbol: CG-823
United States Fav (00) 2 tal
Coast Guard Email: mark.kulwicki@usog.dhs.gov

7501

16 MAY 9005

Reply to CG-823
Attn of: Mark Kulwicki
202-267-2294

To: Assistant Inspector General for Audits
Subj: U.S. COAST GUARD CIVILIAN PAY BUDGET PROCESS
Ref: (a) Draft Report dated March 28, 2005

1. This letter transmits our comments to the Department of Homeland Security Inspector
General draft report findings and recommendations contained in reference (a).

2. We have reviewed the draft report and generally concur with the findings and
recommendations. We have provided some technical comments and corrections for your
consideration.

3. The Coast Guard ‘iates the opportunity to comment on this report and will continue its

work to improve its civilian pay formulation and cxecution procedures. If you have any
questions, please contact Mark Kulwicki at (202)-267-2294.

#
Enclosure: U.S. Coast Guard Comments on Draft Report

10


U.S. Coast Guard
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Executive Summary

In response to a letter dated September 16, 2004 from Chairman Rogers, the Office of
Inspector General (OIG) engaged KPMG LLP (KPMG) to conduct a performance audit
of civilian pay expenses and related budget reprogramming requests made by DHS for
the Coast Guard in FY 2004. In his letter, Chairman Rogers said that the reprogramming
requests were not adequately justified; referred to repeated discrepancies with respect to
civilian pay expenses; and suggested there was little oversight and management review of
these expenses.

We met with the Subcommittee’s staff to discuss the scope of our performance audit that
would address Chairman Rogers’ concerns. We designed our performance audit to meet
the following objectives:

> Assess whether budget formulation and execution processes and internal controls
for civilian pay and benefits (civilian pay) were properly designed, and

> Assess whether those processes and controls, if properly designed, were operating
effectively and could justify civilian pay reprogramming requests.

A copy of Chairman Rogers’ letter is included as Appendix D. We conducted our
performance audit from December 17, 2004 through January 28, 2005, in accordance
with generally accepted government auditing standards issued by the Comptroller
General of the United States.

Results of Audit

The Coast Guard had not designed appropriate processes and internal controls for the
development and execution of the civilian pay budget. As a result, the Coast Guard had
difficulty supporting its FY 2004 reprogramming requests with respect to civilian pay. A
change in the Coast Guard’s budget structure for FY 2004 increased the importance of
good budgetary processes. Prior to FY 2004, civilian pay was part of a much larger
budget category that included military pay. Now civilian pay is its own budget category
and has more visibility.

Recommendations

We recommend the Coast Guard (a) analyze historical and current trend data for each of
the civilian pay components when formulating the civilian pay budget and monitoring its
execution, and (b) document and formalize policies and procedures related to the civilian
pay budget.

Section 3.0 discusses our recommendations in further detail. Section 1.0 of this report
discusses the objective, scope and methodology of our performance audit. Section 2.0
presents the results of our performance audit.


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Appendix E: Management’s Response And Our Analysis

In a memorandum dated May 16, 2005, from the Chief of Staff, U.S. Coast Guard,
management provided an official response to our draft report dated March 28, 2005. On
page 3 of the memorandum, management disagreed with certain statements in our report.
As previously noted, the full text of the memorandum is presented as Section 4.0. We
have evaluated such comments and have revised our report where we deemed necessary.
In addition, in the following paragraphs, we provide KPMG’s responses to certain of
these management comments.

Coast Guard’s Comment - The comment stated, “The old PPA | was over $3 billion;
and AFC-01 (military pay), a component of the old PPA 1, was just under $2 billion.”

KPMG’s Response - We agree with the Coast Guard’s comment. As such, on page 7,
we have revised the report to read, “...compared with military pay, which was nearly $2
billion.”

Coast Guard’s Comment - The comment stated, “The Coast Guard did not omit those
[AR&SC billet costs, see page 10] costs in its FY 2004 budget request; they were
incorrectly included in PPA-6 (Depot Level Maintenance) with the new PPA structure
mandated by Congress. Upon this discovery, the Coast Guard sought the technical
adjustment to correctly allocate these wage grade billet costs to the appropriate PPA. It
should be noted that the Coast Guard did not request to reprogram any dollars with the
AR&SC billets in the first reprogramming. The reprogramming of dollars associated
with AR&SC billets was included in the second reprogramming submission...”

KPMG’s Response — The Coast Guard said that it did not omit AR&SC billet costs in its
FY 2004 budget request, but the net result was that those costs were not included in the
civilian pay PPA. Therefore, we did not change the language in our report. However, we
agree that the Coast Guard did not request to reprogram any dollars with the AR&SC
billets in the first reprogramming. We have revised page 10 of the report to read, “The
Coast Guard requested a correction in its second reprogramming request,” and we
updated Appendix B on page 17 to read, “Technical correction was requested in the
second reprogramming request as the amount was originally classified in PPA-6.”

17


Additional Information and Copies

To obtain additional copies of this report, call the Office of Inspector
General (OIG) at (202) 254-4100, fax your request to (202) 254-4285,
or visit the OIG web site at www.dhs.gov.

OIG Hotline

To report alleged fraud, waste, abuse or mismanagement, or any other
kind of criminal or noncriminal misconduct relative to department
programs or operations, call the OIG Hotline at 1-800-323-8603; or
write to Department of Homeland Security, Washington, DC 20528,
Attn: Office of Inspector General, Investigations Division — Hotline.
The OIG seeks to protect the identity of each caller and writer.



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Appendix B: Summary of Second Civilian Pay Reprogramming Request

($ in millions)

Line Item Amount | Coast Guard’s Explanation KPMG’s Assessment
for Reprogramming
FY04 Omnibus $2.3. | Amount was not considered | Not in Coast Guard’s direct
Rescission when the budget was control. Projecting such
formulated. potential actions can be
difficult at the time of
budget formulation.
Civilian Pay $6.0 | Due to timing difference. Not in Coast Guard’s direct
Raise above control. Coast Guard
President’s budgeted for salaries at the
Budget rate set by OMB.
Congress subsequently
enacted a higher pay raise.
Civilian PCS $1.7 | Category was funded at the —_| Ineffective formulation
Expenses same level as FY 2003; process. Coast Guard did
additional costs were not not consider any increase
budgeted for FY 2004. for FY 2004, although
historical data indicated
otherwise.
Higher Civilian $2.0 | New hires were brought on Ineffective monitoring
Retention board sooner then process.
anticipated.
Military to $1.7 | Actual number of positions Ineffective formulation
Civilian converted from military to process. The FY 2004
Conversions civilian was greater than budget did not consider the
accounted for in budget. increase in military to
civilian conversions as
reflected by the historical
data.
AR&SC Billet $6.0 | Technical correction was Ineffective formulation
Costs requested in the second process. Lack of detailed
reprogramming request as procedures led to this
the amount was originally oversight in the FY 2004
classified in PPA-6. budget.
Total | _ $19.7

14



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as mandated by the Office of Management and Budget (OMB). The Coast Guard’s
budget was enacted on October 1, 2003 as part of the Department of Homeland Security
Appropriations Act, 2004, P.L. 108-90. Subsequently, on January 23, 2004, Congress
enacted a civilian pay raise of 4.1 percent. The Coast Guard said this higher rate of
increase caused a shortfall of $6 million in the civilian pay budget.

The remaining line items in the reprogramming request, however, appeared to result, at
least in part, from insufficient internal controls over the civilian pay budget formulation
and execution processes. A discussion of these weaknesses and the remaining line items
follows. A summary of our assessment of the reprogramming request for all line items is
included as Appendix B.

Budget Formulation Process Needs to Be Strengthened

The Coast Guard formulated its FY 2004 civilian pay budget using traditional methods
that did not readily support its reprogramming requests, particularly considering the new
civilian pay PPA. The primary components of civilian pay PPA were:

Salaries,

Benefits,

Federal Employees Compensation Act (FECA) costs,
Permanent changes of station (PCS) costs,

Awards, and

Overtime.

In the past, the Coast Guard computed the civilian pay budget by multiplying the prior
year’s budgeted civilian salaries and benefits by the anticipated civilian pay increase
specified by OMB.‘ For the other civilian pay components, the Coast Guard added or
subtracted amounts based on judgment, anticipated program initiatives, or other factors.
However, these methods were not subjected to a thorough analysis to support their
validity. Specifically, the Coast Guard did not analyze each of the individual civilian
pay components for historical trends and related cost drivers.

Further, we observed that the Coast Guard lacked specific policies and procedures for
formulating the civilian pay budget. In preparing the FY 2003 and 2004 budget, Coast
Guard personnel used Commandant Instruction M7100.3C, Financial Resource
Management Manual (FRMM) and OMB Circular A-11. The FRMM provided policies
and procedures to assist Coast Guard personnel in various budgeting and accounting
activities; however, the FRMM provided only an overview of the budget process and did
not address the specific policies and procedures to formulate and execute the civilian pay
budget. Specifically, the FRMM did not include step-by-step instructions or guidance to
prepare the civilian pay budget.

4 OMB specifies this increase annually in its Circular A-11, Preparation, Submission, and Execution of the
Budget.


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> Assess whether those processes and controls, if properly designed, were operating
effectively and could justify civilian pay reprogramming requests.

A copy of Chairman Rogers’ letter is included as Appendix D. We conducted our field
work from December 17, 2004 through January 28, 2005, at the Coast Guard’s
headquarters location in Washington, D.C. We focused our work on reprogramming
requests and correspondence provided to the Committee during FY 2004. We also gained
an understanding of internal controls established and implemented over the civilian pay
budget formulation and execution processes.

The purpose of this report is to present the results of our performance audit (Section 2.0),
and our recommendations (Section 3.0). We conducted our performance audit in
accordance with generally accepted government auditing standards issued by the
Comptroller General of the United States.

1.2. Methodology

To achieve the objectives of this performance audit and address Chairman Rogers’
concerns, our review consisted of interviews, document reviews, and certain
corroborative procedures, as discussed below:

¢ Internal interviews — We interviewed key officials within the Coast Guard’s
Planning, Resources and Procurement Directorate, including the Budget Formulation
Division and the Budget Execution Division, to understand the various functions,
activities, information systems, and internal controls relevant to the civilian pay
budget process. In order to identify existing internal controls, we performed walk-
throughs of the process for developing, reviewing and approving the civilian pay
budget and related reprogramming requests. In evaluating the Coast Guard’s internal
controls, we considered the Government Accountability Office’s (GAO) Standards
for Internal Control in the Federal Government.

¢ Document reviews — To further develop our understanding of the civilian pay budget
process, we reviewed applicable Coast Guard policies and procedures and laws and
regulations related to Federal budgeting. To corroborate information from the various
interviews, we reviewed internal documentation (i.e., memoranda, schedules, and
agreements), external reports, and relevant documents (e.g., correspondence with the
Subcommittee) that were available at the time of our evaluation.

¢ Corroboration — We also reviewed prior OIG and GAO audit reports falling within
the scope and objective of our performance audit to familiarize ourselves with any

relevant issues or concerns previously identified by these government oversight
bodies.


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1.0 BACKGROUND

The Coast Guard is a military, maritime service that performs a wide range of security,
safety, law enforcement and emergency response missions. The Coast Guard has
approximately 39,000 active duty personnel, 8,000 reserve members, and 6,000 full-time
permanent civilian employees. In addition, the Coast Guard has an auxiliary of
approximately 32,000 civilian volunteers. In March 2003, the Coast Guard was
transferred from the Department of Transportation to the newly created Department of
Homeland Security.

During FY 2004, DHS submitted two reprogramming requests to Congress on behalf of
the Coast Guard. A reprogramming action involves a movement of funds within an
appropriation to fund requirements not anticipated when the appropriation was approved
by Congress. Unless stipulated by law, an agency has the implicit authority to reprogram
funds in order to manage its appropriations. In most instances, however, appropriation
law requires notification of reprogramming actions to Congressional appropriation
committees when such actions meet certain thresholds or conditions. In general, for FY
2004, Congress required notification from DHS 15 days in advance of reprogrammings
exceeding $5 million dollars or 10 percent, whichever was less.

1.1. Objectives and Scope

In response to a letter dated September 16, 2004 from Chairman Rogers, the OIG
engaged KPMG to conduct a performance audit of civilian pay expenses and related
budget reprogramming requests made by DHS for the Coast Guard in FY 2004. In his
letter, Chairman Rogers said that the reprogramming requests were not adequately
justified; referred to repeated discrepancies with respect to civilian pay expenses; and
suggested there was little oversight and management review of these expenses.

We met with the Subcommittce’s staff to discuss the scope of our performance audit that
would address Chairman Rogers’ concerns. We designed our performance audit to meet
the following objectives:

> Assess whether budget formulation and execution processes and internal controls
for civilian pay and benefits (civilian pay) were properly designed, and

' With respect to reprogramming actions, Section 503 (b) of the Department of Homeland Security
Appropriations Act, 2004, Public Law (P.L.) 108-90, states, “None of the funds provided by this Act...shall
be available for obligation or expenditure for programs, projects, or activities through a reprogramming of
funds in excess of $5,000,000 or 10 percent, whichever is less, that: (1) augments existing programs,
projects, or activities; (2) reduces by 10 percent funding for any existing program, project, or activity, or
numbers of personnel by 10 percent as approved by the Congress; or (3) results from any general savings
from a reduction in personnel that would result in a change in existing programs, projects, or activities as
approved by the Congress; unless the Committees on Appropriations of the Senate and the House of
Representatives are notified 15 days in advance of such reprogramming of funds.”


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Appendix C: Example Monitoring Techniques

Cost Driver(s) Types of Monitoring Techniques
Salaries e FTEs Track the number of current full-time, part-time, and
Promotions temporary employees by job series and grade on a
Retirement monthly basis to develop and monitor civilian hiring
 Military-to- trends.
civilian On a monthly basis, re-evaluate the anticipated
conversions number of new hires, new retirees, and new military-

to-civilian conversions based on the civilian hiring
trends and the current operating environment to
identify potential shortfalls prior to the end of the
fiscal year.

Benefits | ¢ FTEs Track the total amount of civilian benefits by job
¢ Promotions series/grade paid on a monthly basis to develop and
e Retirement monitor benefit-spending trends.
© Military-to- Develop an expectation for the average benefits paid
civilian to employees within each pay grade and series. Using
conversions the expectation developed and the civilian hiring

trends, develop an estimate for anticipated increases or
decreases in civilian benefits for the remainder of the
fiscal year.

PCS Workforce needs at | Track civilian PCS costs at the OMB object class code
Costs Coast Guard units level on a monthly basis, utilizing current obligation
and headquarters data and approved PCS benefits that have been
awarded but not obligated.

FECA Worker’s Prepare a historical trend of FECA costs based on
Costs compensation prior FECA bills.
claims filed
Awards | Exemplary Track award spending by Administrative Target Unit
performance by (ATU) on a monthly basis to identify potential
employees overspending by an ATU.
Overtime | e Workforce Track overtime costs by ATU on a monthly basis to
demands identify potential shortfalls based on the overtime
Current operating trends and current events.
environment

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2.2. Improvements Are Needed to Support the Civilian Pay Category

Two Reprogramming Requests Made in FY 2004

Chairman Rogers expressed concern that two reprogramming requests made during FY
2004 were not adequately justified. DHS submitted two reprogramming requests on
behalf of the Coast Guard on January 24, 2004, and August 12, 2004. In the first
request, the Coast Guard requested significant adjustments to properly align funds to the
new PPA structure. In the second request, the Coast Guard proposed moving $42 million
from the operating funds and unit level maintenance PPA to the other five PPAs. Based
on correspondence provided by the Subcommittee, the second reprogramming request
appeared to be of particular concern.

Of the $42 million requested for the second reprogramming, civilian pay represented
approximately $20 million, or almost half. The Coast Guard provided the following
table to Congress summarizing the reasons for the reprogramming request related to
civilian pay:

Table 1: Components of Second Civilian Pay Reprogramming Request - FY 2004

(in millions)

Line Item Amount
FY04 Omnibus Rescission $2.3
Civilian Pay Raise above President’s Budget $6.0
Civilian PCS Expenses’ $1.7
Higher Civilian Retention $2.0
Military to Civilian Conversions $17
AR&SC Billet Costs* $6.0
Total $19.7

The Omnibus Rescission and the civilian pay raise line items, totaling $8.3 million, or 42
percent of the request, appeared to be beyond the Coast Guard’s direct control. The
Consolidated Appropriations Act of 2004, P.L. 108-199, was enacted on January 23,
2004, after submission of the Coast Guard’s final budget and the beginning of the fiscal
year, and rescinded budget authority of .59 percent. As a result, the Coast Guard
allocated an across the board reduction to all PPAs of .59 percent. The Coast Guard
requested a $2.3 million reprogramming to cover a projected shortfall in the civilian pay
PPA resulting from the rescission.

With respect to the civilian pay raise, the Coast Guard’s request for $6 million resulted
from a timing difference between the budget and legislative processes. The Coast
Guard’s FY 2004 budget request allowed for a 2 percent pay raise for civilian employees,

? PCS stands for permanent changes of station.
3 AR&SC stands for Aircraft Repair and Supply Center.


DEPARTMENT OF HOMELAND SECURITY

Office of Inspector General

AUDIT OF
THE COAST GUARD’S
CIVILIAN PAY BUDGET PROCESS

Office of Audits
OIG-05-29 August 2005



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Stronger monitoring techniques might have also helped the Coast Guard reduce or avoid
the line item in its second reprogramming request titled “higher civilian retention®.” The
Coast Guard said that the civilian hiring rate was faster than anticipated in the budget,
resulting in the need for an additional $2 million. Better monitoring techniques might
have helped budget personnel notice the faster rate and adjust hiring to help avoid a
budget shortfall.

The Coast Guard reported that during FY 2004, it revised the process by which it tracks
and reviews each of the six components of civilian pay. We noted, however, that formal
policies and procedures were not in place to require the use of the methodology, identify
the source of relevant component information, or specify the supervisory reviews to be
performed. GAO’s Standards for Internal Control in the Federal Government says that
internal controls include policies, procedures, and supervisory activities, and should
generally be designed to assure that ongoing monitoring occurs in the course of normal
operations. Appropriate tracking and monitoring of all civilian pay components would
assist in minimizing potential reprogramming requests and identifying and justifying such
requests when needed. Appendix C provides a table of monitoring techniques that the
Coast Guard may wish to consider in a comprehensive review of its monitoring
procedures for civilian pay; however, it is not intended to be all-inclusive.

5 The Coast Guard inadvertently characterized the increased hiring rate of civilians as “higher civilian
retention.”


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The lack of a strong budgeting process for civilian pay contributed to the second
reprogramming request. Civilian PCS expenses and military to civilian conversions line
items in Table 1 accounted for $3.4 million of the requested civilian pay reprogramming.
The Coast Guard chose to fund civilian PCS expenses at the same level as the prior year
without consideration of proposed or planned actions in FY 2004 or historical trends.
Therefore, the Coast Guard did not increase its budget request related to civilian PCS
costs, although historical data showed that the number of relocations was increasing. Of
note, in FY 2005, the Coast Guard has drafted new criteria making PCS eligibility more
restrictive. For military to civilian conversions, the Coast Guard did not use available
historical data to make its projection, and therefore underestimated the conversion rate.
With respect to the $6 million requested for AR&SC billet costs, the Coast Guard
inadvertently omitted those costs in its FY 2004 budget request. The Coast Guard
requested a correction in its second reprogramming request.

Monitoring of Budget Execution Needs to Be Strengthened

In FY 2004, the Coast Guard’s formal procedures to monitor budget execution for
civilian pay were limited primarily to salaries and benefits, and their consumption or
“burn,” rate. Specifically, the allotment fund code manager in the Human Resources
Directorate maintained a spreadsheet that tracked limited information on a monthly basis
for salaries and benefits. The information included actual payroll costs incurred, funding
available for the entire civilian pay PPA, and projected year-end total civilian pay costs.
The manager also maintained a list of bi-weekly payroll costs and an average daily cost
for the related pay period. The manager could only make a comparison of payroll costs
to the total civilian pay budget because the Coast Guard had not provided the manager
with the specific budget amounts for the salary and benefits components. In FY 2004, the
Coast Guard transferred the allotment fund code manager position to the Budget
Execution Division to centralize the civilian pay budget function.

Although salaries and benefits make up most of the civilian pay budget, monitoring
controls need to be expanded and should include all components of civilian pay,
especially in light of the reprogramming threshold that now applies to civilian pay. The
Coast Guard did not use other effective monitoring procedures, such as tracking the
number of full-time, part-time, and temporary civilian employees by job series and grade
on a monthly basis to develop and monitor civilian hiring trends. Oversight of other
civilian pay components was minimal. Field units had responsibility for monitoring and
managing awards and overtime against periodic spending updates provided by
headquarters. These two components, however, represented less than two percent of the
total budgeted civilian pay and benefits in FY 2004.


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2.0 RESULTS OF AUDIT

The Coast Guard had not designed appropriate processes and internal controls for the
development and execution of the civilian pay budget. As a result, the Coast Guard had
difficulty supporting its FY 2004 reprogramming requests with respect to civilian pay. A
change in the Coast Guard’s budget structure for FY 2004 increased the importance of
good budgetary processes. Prior to FY 2004, civilian pay was part of a much larger
budget category that included military pay. Now civilian pay is its own budget category
and has more visibility.

02.1 Civilian Pay Was a New Budget Category in FY 2004

In his letter, Chairman Rogers expressed concern about the level of oversight and
management review of civilian pay expenses. Prior to FY 2004, civilian pay was
monitored as part of a much larger budget category within the Coast Guard’s operating
expense appropriation. A change in budget structure for FY 2004 made the need for
better processes and oversight related to civilian pay more apparent.

Prior to FY 2004, the operating expense appropriation was divided into three categories,
also called program, project, and activity (PPA) elements: personnel resources and two
maintenance categories. Civilian pay was included with military pay in personnel
resources. Civilian pay, however, was only approximately $400 million compared with
military pay, which was nearly $2 billion. For FY 2004, Congress directed the Coast
Guard to expand the three operating expense PPAs to six in total. Civilian pay was
separated from personnel resources and became its own PPA. Appendix A traces the
conversion of PPAs from three to six.

As a separate and distinct PPA, civilian pay became directly subject to the
reprogramming threshold. Previously, the Coast Guard could move funds between
subaccounts within the personnel resources PPA without notification to Congress. Once
civilian pay became its own PPA, however, the Coast Guard had to notify Congress of
the movement of funds in excess of $5 million or 10 percent, whichever was less, in
accordance with P.L. 108-90.

The Coast Guard told us that it had only two months to analyze its allocation
methodology and convert its PPAs from three to six for FY 2004. The change from three
PPAs to six was not always a simple subdivision of each of the original PPAs. In some
cases, two of the old PPAs contributed to a new PPA. Given the limited time and
complexity, the Coast Guard informed us that they believed this change contributed to its
reprogramming requests in FY 2004.


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REPORT DISTRIBUTION

Department of Homeland Security

Secretary

Deputy Secretary

Chief of Staff

General Counsel

Executive Secretariat

Under Secretary, Management
Assistant Secretary for Public Affairs
Chief Financial Officer

Deputy Chief Security Officer

OIG Liaison

United States Coast Guard
Chief of Staff

Chief Financial Officer
OIG Liaison

Office of Management and Budget

Chief, Homeland Security Branch
DHS OIG Program Examiner

Congress

Committee on Homeland Security and Governmental Affairs

United States Senate

Committee on Homeland Security

United States House of Representatives

Congressional Oversight and Appropriations Committees, as appropriate

18


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Table of Contents

TRANSMITTAL LETTER
Executive Summary
1.0 BACKGROUND

11 Objectives and Scope

1.2 Methodology...
2.0 RESULTS OF AUDIT

21 Civilian Pay Was a New Budget Category in FY 2004.

2.2. Improvements Are Needed to Support the Civilian Pay Category
3.0 Recommendations...
4.0 Management’s Response
Appendix A: Program, Project, and ity Structure
Appendix B: Summary of Second Civilian Pay Reprogramming Request
Appendix C: Example Monitoring Technique:
Appendix D: Chairman Rogers’ Letter.
Appendix E: Management’s Response And Our Analysi:

CURRWNNEN


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UNITED STATES COAST GUARD
STATEMENT ON INSPECTOR GENERAL REPORT

TITLE: “Audit of the U.S. Coast Guard Civilian Pay Budget Process” (Draft
Report dated March 28, 2005)

The Coast Guard concurs with the findings included in this report and appreciates the efforts of
KPMG in documenting areas for improvement in the Coast Guard’s civilian pay account. The
Coast Guard also agrees with the recommended actions and is already in the process of
implementing corrective actions. Documentation of policies and procedures is being developed
and will be completed by 15 June 2005. The following comments are provided.

‘The overall finding of the report indicates that the Coast Guard had not designed appropriate
Processes and internal controls for the: 1) formulation; and 2) execution, of the civilian pay
budget. In that regard, the Coast Guard has the following comments:

Recommendation: Formulation of the civilian pay budget

The Coast Guard agrees with the auditor’s findings regarding formulation of the civilian pay
budget and appreciates the suggested corrective measures. The Coast Guard continually seeks
improvements to the formulation process and will attempt to catalog budgeting procedures and
policy in a clear, precise and accurate manner by 15 June 2005. Current directives that are
followed include: OMB Circular A-11, Department of Homeland Security (Department of
Transportation in the past) budget guidance, the Coast Guard Financial Resource Management
Manual, and internal annual fiscal year budget guidance. Annual and periodic training is also
conducted on the budget formulation processes.

In calculating the civilian pay budget the Coast Guard follows a methodology called the
Personnel Compensation and Benefits (PC&B) model, which includes the primary components of
the civilian pay PPA by object classifications 11.1, 11.3, 11.5, 11.8 and 12.1. The process starts
by using the most recent rolled-up civilian pay and personnel base available and then mandatory
base adjustments are applied such as the pay raise, with-in grade increases, and locality pay
increases, etc., followed by adding or subtracting positions (FTP) and Full-Time Equivalents
(FTE) as appropriate. The Coast Guard can do a better job of analyzing the trend data within this
PPA and will work to diligently apply the recommendations of this audit.

Recommendation: Fo
civilian

As noted in the report, the function of the civilian pay allotment fund code (AFC-08) manager
Position was transferred from the Coast Guard’s Human Resource Directorate over to the Coast
Guard’s Budget Execution Division in FY 2004. This allowed the Coast Guard to centralize the
civilian pay budget function. Upon this transfer, the Coast Guard implemented several controls to
better track and execute the main “cost drivers” of the civilian pay account, These controls
included more stringent supervisory reviews and financial system controls that limit the amount
of ci lian relocation costs allowed in a fiscal year; as well as a recurring monthly review of the
civilian pay account by senior-level financial managers in the Human Resource Directorate and
Planning, Resource, & Procurement Directorate. Several other initiatives that have taken place

11


U.S. Coast Guard

AUDIT OF THE COAST GUARD'S CIVILIAN PAY BUDGET PROCESS

Final Report

renee een

Appendix A: Program, Project, and Activity Structure

Expansion of PPAs within the Operating Expense Appropriation

FY 2003 and Prior

Personnel Resources

Operating Funds and

Fy 2004

Military Pay and Allowances
Civilian Pay and Benefits
Training and Recruiting

Operating Funds and

Unit Level Maintenance Unit Level Maintenance

Centrally Managed Accounts

Intermediate and Depot Intermediate and Depot

Level Maintenance

———————> _ Level Maintenance

13



KPMG. KPMG LLP

2001 M Street, NW
Washington, DC 20036

TRANSMITTAL LETTER

January 28, 2005

Acting Inspector General
U.S. Department of Homeland Security

KPMG LLP (KPMG) is pleased to submit this performance audit report, Audit of the
Coast Guard’s Civilian Pay Budget Process, in fulfillment of our contract with the
Department of Homeland Security’s (DHS) Office of Inspector General (OIG). The OIG
asked us to evaluate certain matters related to the civilian pay budget in response to
concerns raised by the Chairman of the House Subcommittee on Homeland Security,
Committee on Appropriations, Harold Rogers. Those concerns are described in Section
1.0 of this report.

We conducted our audit from December 17, 2004 through January 28, 2005, and the
purpose of this report is to communicate the results of our efforts. As such, we present in
Section 2.0 a detailed discussion of our findings pertaining to the Coast Guard’s budget
process for civilian pay.

We have shared the results of our audit with the OIG and officials from the Coast Guard
and DHS and have incorporated official comments from the Chief of Staff, U.S. Coast
Guard, as Section 4.0.

Since January 28, 2005, we have not performed any additional audit procedures, except
as specifically noted in our report, and have no obligation to update our report or to revise
the information contained therein to reflect events occurring subsequent to January 28,
2005. We appreciate the opportunity to serve the OIG and DHS.

KPMG LIP



Office of Inspector General
U.S. Department of

Homeland Security
Washington, DC 20528

sont,

» Homeland
— Security

GE_Ue

The Department of Homeland Security (DHS) Office of Inspector General
(OIG) was established by the Homeland Security Act of 2002 (Public Law 107-
296) by amendment to the Inspector General Act of 1978. This is one of a series
of audit, inspection, and special reports published by the OIG as part of its DHS
oversight responsibilities to promote economy, effectiveness, and efficiency
within the department.

The attached report presents the results of the audit of the U. S. Coast Guard Civilian Pay
Budget Process that was requested by Representative Harold Rogers, Chairman,
Subcommittee on Homeland Security, U.S. House of Representatives. We contracted
with the independent public accounting firm KPMG LLP (KPMG) to perform the audit.
KPMG is responsible for the attached auditor’s report and the conclusions expressed in it.

The recommendations herein have been discussed in draft with those responsible for
implementation. It is our hope that this report will result in more effective, efficient, and
economical operations. We express our appreciation to all of those who contributed to the

preparation of this report.

Richard L. Skinner
Acting Inspector General


U.S, Coast Guard
AUDIT OF THE COAST GUARD’S CIVILIAN PAY BUDGET PROCESS

Final Report
rT

3.0 Recommendations
We recommend that the Coast Guard take the following actions related to civilian pay:

1. Analyze historical and current trend data for each of the civilian pay components
when formulating the civilian pay budget and monitoring its execution.

2. Document policies and procedures for formulating the civilian pay budget. The
procedures should include:

Step-by-step instructions for each component,

Duties of the individuals responsible for formulating the budget,
Data sources and reports to be utilized, and

Periodic review of procedures for continued validity.

cooee

3. Formalize policies and procedures related to monitoring budget execution to require:

Identification of relevant monitoring information,
Supervisory reviews,

Designation of responsible individuals,

Timelines for monitoring activities, and

Periodic review of procedures for continued validity.


U.S. Coast Guard

AUDIT OF THE COAST GUARD’S CIVILIAN PAY BUDGET PROCESS

Final Report

Sener

since the audit include increased monitoring of vacant civilian billets, as well as on-going
controls to better utilize civilian overtime.

The Coast Guard acknowledges its need to improve its documentation of these policies and
procedures and will, in conjunction with its formulation procedures, better formalize these
controls, The Coast Guard will also consult with GAO’s Standards for Internal Control in the
Federal Government, along with DHS OIG and KPMG’s suggestions outlined in Appendix C.

Other Technical Commients and Corrections:

1)

2

Page 7, 2TM paragraph of section 2.1: “Civilian pay, however, was only approximately
$400 million compared with military pay, which was more than $3 billion.” This is
incorrect. The old PPA 1 was over $3 billion; and AFC-01 (military pay), a component
of the old PPA 1, was just under $2 billion.

Page 10, 1" complete paragraph, last two sentences: “With respect to the $6 million
requested for AR&SC billet cosis, the Coast Guard inadvertently omitted those costs in
its FY2004 budget request. The Coast Guard requested a correction in its first
reprogramming request, but that request was not approved.” These sentences are not
factually correct. The Coast Guard did not omit those costs in its FY 2004 budget
request; they were incorrectly included in PPA 6 (Depot Level Maintenance) with the
new PPA structure mandated by Congress. Upon this discovery, the Coast Guard sought
the technical adjustment to correctly allocate these wage grade billet costs to the
appropriate PPA. It should be noted that the Coast Guard did not request to reprogram.
any dollars with AR&SC billets in the first reprogramming. The reprogramming of
dollars associated with AR&SC billets was included in the second reprogramming
submission of August 12, 2004, and was approved by both Homeland Security
subcommittees, This same inaccuracy is stated in the table of Appendix B, page 15,
seventh row, third column.

12