a

GAO

United States General Accounting Office

Report to the Committee on 

Appropriations, U.S. Senate, and the 

Committee on Appropriations, House of 

Representatives

May 2003 FEMA CERRO 

GRANDE CLAIMS

Payments Properly 

Processed, but 

Reported Payments 

Somewhat Overstated

GAO-03-623
FEMA implemented corrective actions to address the recommendations 

from GAO’s prior report to strengthen its policies and procedures. GAO 

found that claims were processed, approved, and paid in accordance with 

FEMA’s established applicable guidelines, providing adequate supporting 

documentation and evidence of supervisory reviews. However, as discussed 

below, claimed amounts approved for payment but not paid were not 

properly tracked in the Office of Cerro Grande Fire Claims’ (OCGFC) 

payment approval system. 

FEMA’s report to the Congress included somewhat overstated claim 

payment information. The report used claimed amounts approved by 

OCGFC for payment, rather than amounts actually paid by FEMA. This 

occurred because FEMA had not reconciled the approved amounts from its 

payment approval system to amounts paid per its accounting system and 

was not aware of the differences, which amounted to about 

$12 million, or 3 percent of total reported payments, as of September 7, 2002. 

FEMA is currently attempting to reconcile the approved amounts with the 

paid amounts. This difference resulted because approved amounts that were 

not paid when claims were delayed for appeal or canceled for other reasons 

were not removed from or adjusted in the payment approval system. As a 

result, the claim payment information reported to the Congress does not 

provide a completely accurate picture of OCGFC claim payments. This 

information was also used by FEMA to determine its request for additional 

funding. Since FEMA received less than it requested, this error likely did not 

result in an appropriation in excess of amounts needed to pay claims. 

During its review, GAO also noted that FEMA’s estimate of its unfunded 

claims liability increased by $91 million from September 30, 2001, to October 

2, 2002. While FEMA’s external auditors found that FEMA used a reasonable 

methodology to calculate the most recent estimate, they were unable to 

explain the reason for the increase in the estimate. This occurred because 

FEMA changed the methodology used but did not provide a crosswalk 

between the two approaches. In April 2003, FEMA officials stated that they 

planned to contract for an analysis to be performed to determine the effect 

that the change in methodology and other factors had on the calculation of 

the estimated liability. 

FEMA CERRO GRANDE CLAIMS 

Payments Properly Processed, but 

Reported Payments Somewhat 

Overstated 

www.gao.gov/cgi-bin/getrpt?GAO-03-623.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Linda Calbom 

at (202) 512-9508 or calboml@gao.gov. 

Highlights of GAO-03-623, a report to the 

Committee on Appropriations, U.S. 

Senate, and the Committee on 

Appropriations, House of Representatives 

May 2003

The Cerro Grande Fire Assistance 

Act mandated that GAO annually 

audit all claim payments made to 

compensate the victims of the 

Cerro Grande Fire in northern New 

Mexico. For this second report on 

this topic, GAO determined 

whether the Federal Emergency 

Management Agency (FEMA), 

which is now a part of the 

Department of Homeland Security, 

(1) had revised its policies and 

procedures to address prior GAO 

recommendations and processed 

and paid claims consistent with 

that guidance and (2) properly 

reported such payments to the 

Congress. 

To improve FEMA’s ability to 

accurately report claims status, 

including amounts paid, and 

request additional funding, GAO 

recommends that the Secretary of 

Homeland Security require the 

Emergency Preparedness and 

Response Directorate to 

• reconcile claim amounts 

approved to amounts paid and 

correct all identified errors in 

its payment approval system 

and 

• perform monthly 

reconciliation of the claims in 

both systems. 

The Department of Homeland 

Security’s Emergency 

Preparedness and Response 

Directorate concurred with our 

recommendations and indicated 

that it has several actions under 

way to address them. 
Page i GAO-03-623 CGFAA Claim Payments

Contents

Letter 1

Results in Brief 2

Background 4

Scope and Methodology 7

Policies and Procedures for Claims Processing Improved and 

Followed 10

Reported Claim Payment Information Was Somewhat 

Overstated 12

Conclusion 15

Recommendations for Executive Action 15

Agency Comments and Our Evaluation 15

Appendix

Appendix I: Comments from the Department of Homeland Security 17

Abbreviations

ACIS Automated Claim Information System

CGFAA Cerro Grande Fire Assistance Act

DFC Disaster Finance Center

FEMA Federal Emergency Management Agency

NOL Notice of Loss

OCGFC Office of Cerro Grande Fire Claims

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Page 1 GAO-03-623 CGFAA Claim Payments

United States General Accounting Office

Washington, D.C. 20548

A

May 8, 2003 Letr

The Honorable Ted Stevens

Chairman

The Honorable Robert C. Byrd

Ranking Minority Member

Committee on Appropriations

United States Senate

The Honorable C.W. Bill Young

Chairman

The Honorable David R. Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives

On July 13, 2000, the President signed into law the Cerro Grande Fire 

Assistance Act (CGFAA).1

 CGFAA established the Office of Cerro Grande 

Fire Claims (OCGFC) and directed the Federal Emergency Management 

Agency (FEMA)2

 to expeditiously investigate victims’ claims, determine 

damages, and compensate the victims of the Cerro Grande fire in northern 

New Mexico. CGFAA also requires FEMA to submit an annual report to the 

Congress by August 28 that provides information on claims submitted 

during the year. CGFAA, as amended,3

 requires that we audit all claim 

payments made under the act, including subrogation claims4 made by 

insurance companies, and report the results of our audit within 120 days of 

the issuance of FEMA’s annual report. In this our second report under 

CGFAA, we determined whether FEMA (1) implemented new policies and 

procedures to address our prior report’s recommendations and processed 

and paid fire claims in accordance with applicable policies and procedures 

and (2) properly reported such payments to the Congress.

1

Pub. L. 106-246, Div. C, Title I, 114 Stat. 511, 583 (2000).

2

As of March 2003, FEMA became part of the Emergency Preparedness and Response 

Directorate of the Department of Homeland Security.

3

Pub. L. 107-73, Title IV, § 428, 115 Stat. 651, 697 (2001).

4

A subrogation claim is the right of one who has paid an obligation that another should have 

paid to be indemnified by the other. In this case, insurance companies and possibly others 

paid claims that the federal government is responsible for paying.
Page 2 GAO-03-623 CGFAA Claim Payments

We did not review any subrogated claim payments as part of this audit 

because as of January 15, 2003, the end of our fieldwork, no subrogated 

claims payments had been made.5

 However, FEMA did report to the 

Congress that as of September 7, 2002, insurance companies had submitted 

4,553 subrogated claims totaling approximately $103 million.6

 FEMA also 

reported that as soon as 95 percent of all nonsubrogee claims have been 

paid, and when funds become available,7 payments for subrogation claims 

will be made to insurers expeditiously. We will review payments made for 

subrogated claims as part of our next audit.

Results in Brief FEMA revised its policies and procedures to address our prior report’s 

recommendations and processed and paid fire claims in accordance with 

its applicable policies and procedures. In response to our prior audit 

report, issued in July 2001,8

 FEMA implemented corrective actions to 

address our recommendations to (1) document all steps and procedures 

performed by claims reviewers to determine the validity of a claim and the 

amount recommended for payment, (2) incorporate all existing informal 

guidance into a set of formal policies and procedures, and (3) establish 

standardized policies and procedures to address claims for which no policy 

had existed. Based on the results of our statistical testing, we found that 

claims were processed, approved, and paid in accordance with FEMA’s 

revised policies and procedures. However, as discussed below, we found 

that claimed amounts approved but not yet paid were not properly tracked 

in OCGFC’s payment approval system. 

FEMA’s second annual report to the Congress, dated December 16, 2002, 

included somewhat overstated claim payment information. FEMA’s report 

5

CGFAA specifies that nonsubrogee claims, to the maximum extent practicable, be paid 

before subrogee claims.

6

OCGFC stated that the amount represents either the amount of claims processed and 

approved by the claims reviewer or, if not processed, the amount submitted by the 

claimants.

7

In its transmittal letter dated December 16, 2002, which accompanied its annual report to 

the Congress, FEMA stated that an additional $155 million, including $5 million in 

administrative costs, was needed. In February 2003, FEMA was appropriated an additional 

$90 million, of which $5 million is available for administrative purposes.

8

U.S. General Accounting Office, Federal Emergency Management Agency: Weaknesses 

Exist in the Cerro Grande Fire Assistance Claim Validation Process, GAO-01-848

(Washington, D.C.: July 13, 2001).
Page 3 GAO-03-623 CGFAA Claim Payments

was based on claimed amounts approved for payment, as reported in its 

payment approval system, rather than amounts actually paid, as reported in 

FEMA’s accounting system. FEMA officials said they believed the amounts 

to be the same, but had not reconciled the data and were not aware of a 

$12 million difference between the two systems, which was almost 3 

percent of amounts reported paid. FEMA is currently attempting to 

reconcile the approved claim amounts with the amounts actually reported 

as paid. We found that the primary reason for the difference was 

overstatements of claimed amounts approved for payment in OCGFC’s 

payment approval system. This overstatement was caused by approved 

claim amounts that were being appealed, replaced by other claims, or 

otherwise not paid that were not removed from or adjusted in the payment 

approval system. As a result, the claim payment information reported to 

the Congress does not provide a completely accurate picture of Cerro 

Grande claim payment activity for the year. In addition, the erroneous 

approved claims data were used to determine FEMA’s request for 

additional appropriated funding. Because $90 million, rather than the $155 

million FEMA stated it needed, was appropriated to FEMA, it does not 

appear that the errors resulted in an appropriation in excess of the amount 

needed to pay claims.

In reviewing FEMA’s fiscal year 2002 financial statements, we also noted 

that FEMA’s estimate of its unfunded claims liability increased significantly 

compared to the prior year—from $36.5 million as of September 30, 2001, 

to $127.5 million as of October 2, 2002.9

 While FEMA’s external auditors 

found that FEMA used a reasonable methodology to calculate the current 

year liability, they were unable to explain the reason for the differences in 

the two estimates since FEMA changed the methodology but did not 

provide a crosswalk between the two approaches. The auditors noted this 

lack of analysis of the change in methodology as a weakness in their report 

on internal controls for fiscal year 2002. In April 2003, FEMA officials 

stated that FEMA would award a contract to perform an analysis to 

determine the dollar impact on the liability estimate due to changes in 

methodology, assumptions, systems, data, or other factors, from fiscal 

years 2002 through 2001. 

9

In January 2003, FEMA’s auditor used the correct payment data, plus other adjustments, 

and proposed an adjustment to the October 2, 2002, unfunded liability, with which FEMA’s 

management concurred. This resulted in a reduction of $21.7 million.
Page 4 GAO-03-623 CGFAA Claim Payments

We are making two recommendations that, if properly implemented, will 

improve FEMA’s ability to track claims it approves and pays and help 

ensure the accuracy of amounts approved and paid in its systems, in 

reports to the Congress, and in amounts used to request additional funding. 

In commenting on a draft of the report, the Acting Director of the Recovery 

Division of the Department of Homeland Security’s Emergency 

Preparedness and Response Directorate agreed with our recommendations 

and outlined several corrective actions that it is currently undertaking to 

address these issues.

Background On May 4, 2000, the National Park Service initiated a prescribed burn on 

federal land at Bandelier National Monument, New Mexico, in an effort to 

reduce the threat of wildfires in the area. The plan was to burn up to 900 

acres. On May 5, 2000, the prescribed burn exceeded the capabilities of the 

National Park Service, spread to other federal and nonfederal land, and was 

characterized as a wildfire. On May 13, 2000, the President issued a major 

disaster declaration, and subsequently, the Secretary of the Interior and the 

National Park Service assumed responsibility for the fire and the loss of 

federal, state, local, tribal, and private property. The fire, known as the 

Cerro Grande fire, burned approximately 48,000 acres in four counties and 

two Indian pueblos, destroyed over 200 residential structures, and forced 

the evacuation of more than 18,000 residents.

On July 13, 2000, the President signed CGFAA into law. Under CGFAA, 

each claimant is entitled to be compensated by the United States 

government for certain injuries and damages that resulted from the Cerro 

Grande fire. The Congress appropriated $455 million to FEMA for the 

payment of such claims and $45 million for the administration of the Cerro 

Grande program. In March 2002, FEMA requested, but did not receive, 

additional appropriated funding of $80 million to cover excess claims and 

administrative costs. In December 2002, FEMA revised its estimate and 

requested additional appropriated funding of $155 million, including 

$5 million for administrative costs. The revised estimate was based on 

more complete claim information since the final date to submit claims 

passed on August 28, 2002. In February 2003, FEMA was appropriated an 

additional $90 million, of which $5 million may be made available for 

administrative purposes. 
Page 5 GAO-03-623 CGFAA Claim Payments

CGFAA requires that FEMA submit an annual report to the Congress that 

provides information about claims submitted under the act. This annual 

report is to include the amounts claimed, a description of the nature of the 

claims, and the status or disposition of the claims, including the amounts 

paid. FEMA’s report is to be issued annually by August 28. CGFAA, as 

amended, requires that we conduct annual audits on the payment of all 

claims made and report the results of the audits to the Congress within 120 

days of FEMA’s issuance of its annual report. The act also requires that our 

report include a review of all subrogation claims for which insurance 

companies have been paid. On January 8, 2003, FEMA notified us that it 

had issued the annual report to the Congress through a transmittal letter 

dated December 16, 2002,10 and FEMA provided us a copy of the annual 

report on January 9, 2003. We are publishing our report within 120 days of 

FEMA’s notification of its issuance.

CGFAA required that FEMA promulgate and publish implementing 

regulations for the Cerro Grande program within 45 days of enactment of 

the law. On August 28, 2000, FEMA published Disaster Assistance: Cerro 

Grande Fire Assistance; Interim Final Rule in the Federal Register

(Interim Final Rules).11 FEMA modified the Interim Rule with a set of 

implementing policies and procedures on November 13, 2000. FEMA 

updated these policies and procedures in January and March 2001. After 

reviewing public comments on the interim rule, FEMA finalized and 

published Disaster Assistance: Cerro Grande Fire Assistance Final Rule

(Final Rule) on March 21, 2001.12 Since our prior report, FEMA revised and 

implemented policies and procedures, which are discussed later in this 

report. 

The claims payment process is initiated when an injured party submits a 

Notice of Loss (NOL)13 to OCGFC. After the NOL is received, claim 

reviewers contact the claimant to discuss the claim, explain the claims 

process, and determine the best means to substantiate the loss or damages. 

10In its fiscal year 2002 financial statement audit, FEMA’s external auditors reported the late 

submission of the annual report as an instance of noncompliance with CGFAA in their 

report on compliance with laws and regulations. 

1165 FR 52260, 44 C.F.R. Part 295 (2000).

1266 FR 15948, 44 C.F.R. Part 295 (2001).

13The NOL describes in general terms the types of injury and/or damages a claimant has 

incurred as a result of the fire.
Page 6 GAO-03-623 CGFAA Claim Payments

The claim reviewer then assigns a claim number and enters the information 

into OCGFC’s claim-processing database, the Automated Claim 

Information System (ACIS). The claims reviewer then begins the process 

of verifying the victim’s claim. Once completed, the claims reviewer 

prepares a claim payment recommendation package, which specifies that a 

claimant’s injuries or damages occurred as a result of the Cerro Grande fire 

and that claimed amounts are eligible for compensation under CGFAA. 

The claim reviewer also inputs reserve amounts equal to the total claimed 

amounts it expects to be paid into the claim-processing database and a 

claims supervisor reviews and approves each recommendation package. 

This review, among other things, is intended to ensure that a proper 

investigation of the claim occurred and that the proper documentation 

exists.

Following the approval of the claim payment recommendation package, an 

Approval for Payment form is completed and sent to an OCGFC authorizing 

official for review and approval. The amounts approved for payment are 

then added to a Schedule of Payments that is forwarded to the Comptroller. 

The Comptroller reviews a sample of requested and approved payments 

and then approves the Schedule of Payments and records the approved 

amounts in OCGFC’s payment approval system before sending it on to 

FEMA’s Disaster Finance Center (DFC) for additional manual processing 

and final approval for the Department of the Treasury to disburse the 

funds. FEMA records all payments in its accounting system, the Integrated 

Financial Management Information System, which is not linked to 

OCGFC’s payment approval system.
Page 7 GAO-03-623 CGFAA Claim Payments

In addition to this process, which is used for both partial payments14 and 

final payments, prior to processing a final payment, the claims reviewer 

prepares a Proof of Loss form. This form summarizes all amounts 

recommended for payment, including those amounts previously paid 

through a partial payment. The Proof of Loss form must be signed by the 

claimant subject to the provisions of 18 U.S.C. §1001, which establishes 

criminal penalties for false statements. Once a signed Proof of Loss form is 

received, an OCGFC authorized official sends a Letter of Final 

Determination to tell the claimant the total amount of compensation being 

offered under CGFAA. Accompanying this letter is a Release and 

Certification form that the claimant signs if he or she accepts the OCGFC 

compensation determination, thereby releasing the federal government 

from any additional claims arising from the Cerro Grande fire.15 Upon 

receipt of the signed Release and Certification form, FEMA will process 

and mail a claimant’s final payment.

Scope and 

Methodology

In performing our review, we considered the Standards for Internal 

Control in the Federal Government.

16 To reaffirm our understanding of the 

claim review and payment process established by OCGFC and to follow up 

on the changes made to this process since our last report, we interviewed 

FEMA officials and analyzed data used (1) in FEMA’s annual report to the 

Congress, (2) by KPMG during its audit of FEMA’s financial statements, and 

(3) by FEMA to determine the estimated claim liability. We also reviewed 

the following:

• the requirements of CGFAA, 

• the final regulations published in the Federal Register, 

• FEMA’s policies and procedures manual, 

14In order to get assistance to fire survivors as soon as possible, CGFAA allows for claimants 

to receive partial payments before the start of the rebuilding process. Partial payments may 

be based upon actual receipts or estimates. Final payments are made only after the entire 

claims review process is completed.

15Section 295.34 of the final rule published in the Federal Register provides for the 

reopening of claims, not withstanding the submission of a Release and Certification form, 

under certain circumstances.

16U.S. General Accounting Office, Standards for Internal Control in the Federal 

Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
Page 8 GAO-03-623 CGFAA Claim Payments

• the independent actuarial report estimating FEMA’s total claim liability 

for fiscal year 2001,

• a summary of FEMA’s unpaid claim liability estimates for fiscal year 

2002,

• FEMA’s fiscal years 2001 and 2002 audited financial statements, and

• the current year Cerro Grande trial balance and other documentation 

concerning the Cerro Grande program. 

We also obtained, reviewed, and considered the results of numerous desk 

reviews, by FEMA’s Office of Inspector General, of claims approved for 

payment. Finally, we selected two statistical samples from the population 

of all partial and final claim payments to determine whether FEMA 

processed, approved, and paid the Cerro Grande fire claims in accordance 

with its applicable policies and procedures. 

To determine whether FEMA implemented corrective actions to address 

our prior year recommendations and OCGFC processed and paid claims in 

accordance with the revised policies and procedures, we followed up on 

FEMA’s corrective actions and performed certain tests to ensure that 

policies and procedures were being followed. We reviewed the revised 

policies and procedures to ensure that they were incorporated into FEMA’s 

policies and procedures or modified in its claim-processing contract, and 

performed tests of both claims approved for payment by OCGFC and 

amounts paid by DFC, as reported by FEMA, as follows.

• We selected a dollar unit (statistical) sample of 95 claims totaling 

$311,232,388 that were approved for payments from a population of 

15,394 reported partial and final claim amounts that had been approved 

for payment from August 28, 2000 (inception), through September 7, 

2002, to test specific control activities, such as adequacy of supporting 

documentation, evidence of claims manager and approving official 

review, and actual payment by FEMA. We obtained and reviewed 

related supporting documentation for the approved claim payments that 

were selected from OCGFC’s payment approval system.

• We selected a dollar unit (statistical) sample of 77 claim payments 

totaling $152,493,242 from a population of 47,674 actual payments made 

by FEMA from August 28, 2000, through September 7, 2002, to verify 

that only approved claims were paid. We obtained and reviewed related 
Page 9 GAO-03-623 CGFAA Claim Payments

supporting documentation for the claim payments that were selected 

from a database of claim payments made by DFC as reported in FEMA’s 

accounting system.

In order to determine whether FEMA properly reported claim payment 

information to the Congress, we compared its reported payment 

information to the claimed amounts that were approved by OCGFC for 

payment from its payment approval system and to the actual claim 

payments made by DFC and reported in FEMA’s accounting system. We 

also obtained and reviewed supporting documentation and discussed the 

unreconciled differences we identified with FEMA officials.

As mentioned previously, we did not audit subrogated claim payments 

since none were paid. We did, however, obtain a report from OCGFC 

indicating that as of January 15, 2003, 3,847 of 4,561, or 84 percent, of the 

subrogated claims totaling approximately $103 million had been submitted 

and approved for payment, but not yet paid.

Our work was conducted in Santa Fe, New Mexico; Denton, Texas;17 and 

Washington, D.C., from September 2002 through January 2003 in 

accordance with generally accepted government auditing standards. We 

requested agency comments on a draft of this report from the Under 

Secretary of the Department of Homeland Security’s Emergency 

Preparedness and Response Directorate. The Department of Homeland 

Security’s Office of Inspector General provided certain technical comments 

orally, which we have incorporated as appropriate. The Acting Director of 

the Recovery Division of the Department of Homeland Security’s 

Emergency Preparedness and Response Directorate also provided written 

comments in response to our draft on behalf of FEMA and OCGFC, which 

are reprinted in appendix I. We discussed the written comments in the 

“Agency Comments and Our Evaluation” section of this report.

17In December 2002, OCGFC closed its headquarters operations in Santa Fe, New Mexico, 

and moved the remaining claims operations to FEMA’s National Processing Center in 

Denton, Texas.
Page 10 GAO-03-623 CGFAA Claim Payments

Policies and 

Procedures for Claims 

Processing Improved 

and Followed

Since our last audit report, FEMA implemented corrective actions and 

revised its policies and procedures to address issues related to its controls 

over the claims review process. Based on the results of our statistical 

testing, claims were processed, approved, and paid in accordance with 

FEMA guidelines that were established and in place at the time the claims 

were reviewed and processed.18

In response to our July 2001 report, FEMA implemented corrective actions 

to address our recommendations related to its policies and procedures. In 

that report, we recommended that FEMA (1) require claims reviewers to 

document all steps and procedures they perform to determine the validity 

of a claim and the amount recommended for payment, (2) review and 

consolidate all existing informal guidance and incorporate this guidance 

into a set of formal policies and procedures, and (3) establish standardized 

policies and procedures to address claims for which no policy currently 

exists. During this review, we confirmed that FEMA had done this. 

Specifically, FEMA’s improvements consisted of revising its policies and 

procedures and issuing a new task order. 

• FEMA revised its contract with its claims reviewers and issued a new 

task order. This task order required that certain documentation 

obtained related to claims verification or attempts the claims reviewer 

made to obtain this sort of documentation19 be placed in each claim file. 

The required documentation consists of items such as proof of identity, 

proof of ownership or occupancy at the time of the fire, systems used to 

verify or estimate values, proof of vehicle ownership (title or 

registration) at the time of the fire, and verification of insurance as part 

of efforts to preclude duplicate reimbursements for losses. The task 

order also required evidence of supervisory review, with the signatures 

of the claims manager and approving official on the Approval for 

Payment form. Based on the results of our statistical testing, we found 

that all claim files submitted after the implementation of the new task 

18We did not identify any control weaknesses in our review of the 95 statistically selected 

approved claims.

19Claims reviewers are now required to include documentation of all telephone 

conversations and attempts to contact or obtain support from claimants in the notes 

maintained in ACIS. In cases where documentation submitted is insufficient, the claims 

reviewers will perform the independent investigations necessary to make recommendations 

to FEMA.
Page 11 GAO-03-623 CGFAA Claim Payments

order contained the required documentation and evidence of 

supervisory review.

• In April 2002, FEMA issued revised guidelines to ensure that all existing 

informal guidance was incorporated into a set of formally documented 

policies and procedures and distributed them to all staff members 

responsible for the claims review and award determination process. 

FEMA stated that the revised guidelines were distributed to all staff 

members and that it now has a process to review its policy manual 

monthly and incorporate new policies or policy changes into it as 

needed. We reviewed the new guidelines and verified that the 

previously informal and unofficial policies that the claim reviewers used 

had been incorporated.

• FEMA also developed various policies and procedures to cover 

situations for which none previously existed. For example, to address 

claimants’ concerns about the declining value of residential property as 

a result of the fire, FEMA determined the decline to be temporary and 

developed policies and procedures to compensate claimants only for 

losses suffered if their residential property was sold at less than fair 

market value.20 Policies and procedures were also developed to address 

the unique aspects of compensation under CGFAA, such as legal issues 

regarding who is a proper claimant if the injured party is now deceased 

and compensation for lost rental income. We reviewed the new 

guidelines and verified that such policies and procedures were 

incorporated. 

The improvements FEMA made to its claims processing function help 

ensure that paid claims are valid and reasonable. However, as discussed in 

the next section, we found four errors related to FEMA’s tracking and 

reporting of amounts approved and paid.

20Fair market values were established in PricewaterhouseCooper’s Economic Study of the 

Los Alamos Post-Fire Residential Real Estate Market (Final Report).
Page 12 GAO-03-623 CGFAA Claim Payments

Reported Claim 

Payment Information 

Was Somewhat 

Overstated

FEMA’s report to the Congress overstated the amount of claim payments 

made under CGFAA through September 7, 2002, by about $12 million, or 3 

percent of reported payments. CGFAA requires FEMA to issue a report 

detailing the amounts claimed, a brief description of the nature of the 

claims, and their status or disposition, including the amount of any 

payments. For its most recent annual report to the Congress, FEMA used 

the information contained in OCGFC’s payment approval system, which 

contains amounts approved for payment by OCGFC. However, there were 

errors in this system that overstated the amounts actually paid by DFC to 

claimants by approximately $12 million. The overstated approved claim 

data were also used to determine FEMA’s December 2002 requests for 

additional appropriations. However, since FEMA received less than it 

requested, this error likely did not result in an appropriation in excess of 

amounts needed to pay claims.

The overstatement of the claims paid amount was not identified by FEMA 

because it did not reconcile the amounts OCGFC approved for payment to 

the actual DFC payment data21 and was not aware of the differences 

between the two databases. As a result, FEMA incorrectly reported in its 

annual report to the Congress that $418 million was paid on claims through 

September 7, 2002, instead of the almost $406 million actually paid, as 

summarized in FEMA’s accounting system for activity through the same 

date, a difference of $12 million, or about 3 percent of amounts reported 

paid.

Most of the difference was due to FEMA’s treatment of claimed amounts 

that were approved for payment and/or appealed claims. When approved 

amounts are not fully paid because of appeals or other reasons, the 

payment approval system continues to show the entire claimed amount 

that was approved for payment even though the approved amount or a 

portion of it has, in fact, been withheld from payment, canceled and not 

paid, or replaced by a new claim request. FEMA did not remove these 

amounts from its system or adjust the total approved amounts not yet paid. 

As a result, OCGFC’s payment approval system overstates approved claims 

designated as paid.

21As part of FEMA’s fiscal year 2002 financial statement audit, its auditors determined that 

amounts were correctly reported as paid by DFC in FEMA’s accounting system. In addition, 

our review of the 77 statistically selected claim payments verified the accuracy of the 

amounts paid by DFC and no control weaknesses were identified.
Page 13 GAO-03-623 CGFAA Claim Payments

For example, as part of our review of the 95 statistically selected approved 

claims, we found 4 claims in which the approved amounts reported in 

OCGFC’s payment approval system were larger than the actual payments 

made by DFC.22 In one case, a claim file included more than $1.8 million in 

approved payments, while the actual amount paid was $919,802.23 OCGFC 

records on this case showed that it originally approved $934,802 for a final 

payment. However, when the claimant appealed the amount, OCGFC 

approved the claimant’s request to pay $919,802 as a partial payment 

pending the appeal. OCGFC prepared and approved a second claim 

without canceling the original claim or removing the original amount from 

its payment approval system. This one oversight alone overstated the 

approved claim amounts by $934,802. As of February 2003, FEMA officials 

began manually reconciling the payment data between the two systems and 

identifying the errors in the payment approval system.

The overstated payment amounts were also used to determine FEMA’s 

request for additional funding from the Congress. In December 2002, 

FEMA requested additional funding of $155 million for fiscal year 2002, 

including $5 million for administrative costs.24 However, only $90 million 

was appropriated to FEMA.25 Thus, it does not appear that the overstated 

payments resulted in an appropriation in excess of the amounts needed to 

pay estimated claims.

22We did not statistically estimate the total amount in error since the reconciliation between 

the two systems revealed that $12 million was the actual dollar amount of the total errors in 

the payment approval system.

23The claimant originally submitted a claim with total damages and losses in the amount of 

$1.6 million.

24The request was based on FEMA’s original calculation of its October 2, 2002, unfunded 

liability, which was for $149.2 million.

25In February 2003, the VA, HUD and Independent Agencies Appropriations Act 

appropriated FEMA an additional $90 million, of which $5 million may be made available for 

administrative purposes (Pub. L. 108-07, Div. K, 2003).
Page 14 GAO-03-623 CGFAA Claim Payments

We also noted that FEMA’s estimate of unfunded claims liability had 

increased significantly compared to the prior year. In January 2003, FEMA 

revised its estimated unpaid Cerro Grande claims liability as of October 2, 

2002, and calculated an estimated unpaid claim liability of $177.5 million, of 

which $127.5 million was unfunded.26 This compares to an actuarially 

determined estimate calculated by an independent accounting firm of 

$260.1 million as of September 30, 2001, of which $36.5 million was 

unfunded. As part of the audit of FEMA’s fiscal year 2002 financial 

statements, its auditors assessed FEMA’s methodology for calculating its 

estimated unfunded liability for fiscal year 2002 and attempted to 

determine the reason for the $91 million increase in the liability since the 

prior year.

The auditors determined that FEMA’s fiscal year 2002 methodology was 

reasonable, but were unable to explain the reason for the difference in the 

two estimates since FEMA used a different methodology to calculate the 

estimate than had been previously used, but did not provide a “crosswalk” 

between the two approaches. The auditors reported this as a weakness in 

FEMA’s process for estimating the remaining liability for the Cerro Grande 

program in its internal control report for fiscal year 2002. The weakness 

specifically related to a lack of (1) an impact analysis for the change in 

estimating methodology and (2) supporting documentation for certain 

factors and assumptions, for which FEMA eventually re-created the 

documentation to support the calculation.27 In April 2003, FEMA officials 

stated FEMA is in the process of awarding a contract to perform an 

analysis to determine the dollar effect on the increased claim liability 

estimate due to changes in methodology, assumptions, systems, data, or 

other factors, from fiscal year 2001 to fiscal year 2002. 

26The unfunded liability was adjusted for the overstated payments plus another adjustment 

as part of the fiscal year 2002 audit of FEMA’s financial statements. Therefore, FEMA’s 

initial estimate of the unfunded liability of $149.2 million was decreased to $127.5 million.

27The auditors recommended that FEMA (1) perform an analysis to determine the dollar 

impact on the liability estimate due to changes in methodology, assumptions, systems, data, 

or other factors, from fiscal years 2002 through 2001, and (2) ensure that supporting 

documentation for program estimates that are used for financial reporting purposes be 

maintained as part of the estimate documentation file. FEMA agreed with the 

recommendation.
Page 15 GAO-03-623 CGFAA Claim Payments

Conclusion FEMA’s actions to strengthen its policies and procedures over its claim 

approval process helped ensure that paid claims were valid and reasonable. 

However, weaknesses in how the Emergency Preparedness and Response 

Directorate records and tracks approved claims in its payment approval 

system resulted in an overstatement of approved claims, which had a 

cascading effect on payment amounts reported to the Congress and used to 

calculate requests for additional funding. While the amount of the 

overstatement was relatively insignificant, left unchecked, the weaknesses 

in the payment approval system could result in larger errors in future 

reports to the Congress and requests for additional funding.

Recommendations for 

Executive Action

We recommend that the Secretary of the Department of Homeland Security 

direct the Emergency Preparedness and Response Directorate to

• complete the reconciliation of the amounts approved for payment in its 

payment approval system to amounts actually paid in FEMA’s 

accounting system and correct all identified errors in its payment 

approval system and

• perform monthly reconciliations of the approved claim amounts in its 

payment approval system with the actual amounts reported in its 

accounting system as paid by DFC for as long as both systems are used 

to track and report paid amounts or request additional funding.

Agency Comments and 

Our Evaluation

FEMA, in a letter from the Acting Director of the Recovery Division of the 

Department of Homeland Security’s Emergency Preparedness and 

Response Directorate, agreed with our recommendations and described 

specific corrective actions currently under way to address each one. For 

example, the Acting Director indicated that OCGFC has substantially 

completed the reconciliation of the amounts approved for payment in its 

payment approval system to amounts actually paid in FEMA’s accounting 

system and intends to implement monthly reconciliations beginning this 

month. We will perform a follow-up review of these activities as part of our 

review of the Cerro Grande annual report that is due to the Congress on 

August 28, 2003. The Department of Homeland Security’s comments are 

reprinted in appendix I.

We are sending copies of this report to the congressional committees and 

subcommittees responsible for issues related to FEMA and the Department 
Page 16 GAO-03-623 CGFAA Claim Payments

of Homeland Security; the Secretary of the Department of Homeland 

Security, the Under Secretary of the Department of Homeland Security’s 

Emergency Preparedness and Response Directorate; and the Inspector 

General of the Department of Homeland Security. Copies will also be made 

available to others upon request.

If you have any questions about this report, please contact me at (202) 512-

9508 or Steven Haughton, Assistant Director, at (202) 512-5999. The other 

key contributor to this assignment was Christine Fant.

Linda M. Calbom

Director, Financial Management and Assurance
Page 17 GAO-03-623 CGFAA Claim Payments

Appendix I

Comments from the Department of Homeland Apendxies

Security ApendxiI
Appendix I

Comments from the Department of Homeland 

Security

Page 18 GAO-03-623 CGFAA Claim Payments
Appendix I

Comments from the Department of Homeland 

Security

(190078) Page 19 GAO-03-623 CGFAA Claim Payments
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