FEMA Cerro Grande Claims: Payments Properly Processed, but Reporting Could Be Improved
Published: 2003-12-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Cerro Grande Fire Assistance Act (CGFAA) mandated that GAO annually audit all claim payments made to compensate the victims of the Cerro Grande Fire in northern New Mexico. For this third report on this topic, GAO determined whether the Federal Emergency Management Agency (FEMA), which is now a part of the Emergency Preparedness and Response Directorate of the Department of Homeland Security, (1) paid fire claims in accordance with applicable guidance and (2) implemented corrective actions to address prior GAO recommendations, including determining if FEMA properly reported claim payments to the Congress.
section_title: What GAO Found
paragraphs: FEMA processed and paid its claims in accordance with its policies and procedures that were established and in place at the time the claims were reviewed and processed. For the period from August 29, 2002, to June 30, 2003, FEMA approved $40 million in claims for payment, including the initial payment of most of the subrogation claims made by insurance companies. In response to GAO's May 2003 report, FEMA established processes to address GAO's recommendations related to reconciling claimed amounts approved with actual amounts paid. These processes included comparing the individual amounts approved for payment to the amounts actually paid from inception through June 30, 2003, by claim, as well as performing complete reconciliations of total amounts that were approved and paid for the same period and as of August 31, 2003. In addition, in our prior report, we noted that FEMA improperly reported unreconciled claim amounts approved for payment as amounts actually paid. In its 2003 annual report, FEMA properly identified claimed amounts as approved amounts for payment rather than actual amounts paid in a schedule that was included in its annual report to the Congress. However, FEMA no longer provided summary information on amounts claimed, amounts approved, and its remaining estimated liabilities in its report to the Congress and did not include any information on claims paid as is required by CGFAA. Without this information, the report is less useful to the Congress and other stakeholders.

section_title: Letter
paragraphs: On July 13, 2000, the President signed into law the Cerro Grande Fire  Assistance Act (CGFAA).  CGFAA established the Office of Cerro Grande  Fire Claims (OCGFC) and directed the Federal Emergency Management  Agency (FEMA) to expeditiously investigate 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 and  amounts paid during the year.  CGFAA, as amended, requires that we audit  all claim payments made under the act, including subrogation claims 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 third report under  CGFAA, we determined whether FEMA (1) paid fire claims in accordance  with applicable policies and procedures and (2) implemented corrective  actions to address our prior report’s recommendations, including  determining if FEMA properly reported claim payments to the Congress.
Based on the results of our statistical testing, FEMA processed and paid its  claims in accordance with its policies and procedures that were established  and in place at the time the claims were reviewed and processed.  These  procedures included obtaining and reviewing proper documentation of  claims, approvals, and release forms.  For the period from August 29, 2002,  through June 30, 2003, FEMA approved $40 million in claims for payment,  including the initial payment of subrogation claims.
FEMA addressed our prior recommendations related to reconciling  claimed amounts approved with actual amounts paid.  In response to our  May 2003 report, FEMA compared the amounts approved for payment to  the amounts actually paid for each claim from inception through June 30,  2003.  It also performed complete reconciliations of total amounts  approved and paid through the same period and as of August 31, 2003.  In  addition, in our prior report, we noted that FEMA improperly reported  unreconciled claim amounts approved for payment as amounts actually  paid.  In its 2003 annual report, FEMA properly identified claimed amounts  as approved amounts for payment rather than actual amounts paid in a  schedule that was included in its annual report to the Congress.  However,  FEMA no longer summarized the amounts claimed, amounts approved, and  the remaining program liabilities in its report to the Congress and did not  include any information on claims paid as is required by CGFAA.  Without  this information, the report is less useful to the Congress and other  stakeholders.
We are making a recommendation that addresses this reporting issue.  In  commenting on a draft of the report, the Director of the Recovery Division  of the Department of Homeland Security’s Emergency Preparedness and  Response Directorate agreed with our recommendation to include the  summary-level information in its next annual report.
subsections: section_title: Background
paragraphs: 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.  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 Rule).  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.
The Congress initially 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 additional 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 had  passed on August 28, 2002.  In February 2003, FEMA was appropriated an  additional $90 million, of which up to $5 million may be made available for administrative purposes.  FEMA stated that only $2 million was used in  fiscal year 2003 for administrative purposes.  In October 2003, FEMA  received an additional appropriation of $38.062 million, of which 5 percent  may be made available for administrative costs. After FEMA allocated a  specific amount for administrative costs, it had a maximum of   $578.6 million available for the payment of claims under CGFAA.  During  the audit, FEMA provided revised claim data that reflected the amounts  shown in table 1.
The claimed amounts that FEMA approved for payment through   September 9, 2003, included $51.5 million of approved subrogation claims.   Pending claims included expected payments for individual, business,  governmental, and pueblo claims, and projected liabilities consisted of  potential future appeals, potential arbitrations, and contingency for judicial  review.
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.  In May 2003, we issued our second report on  the audit of Cerro Grande claim payments made from inception through  August 28, 2002.  The report stated that FEMA properly processed and paid  claims but overstated amounts paid in its report to the Congress and made  two recommendations regarding the reconciliation of the approved and  paid amounts in its payment approval and accounting systems.  FEMA  issued its most recent annual report on August 28, 2003, with claim  amounts approved for payment through June 30, 2003.
section_title: Scope and Methodology
paragraphs: In performing our review, we considered the Standards for Internal  Control in the Federal Government.  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 in FEMA’s annual report to the  Congress and data used 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;  a summary of FEMA’s unpaid claim liability estimates as of September 9,  2003;  FEMA’s fiscal year 2002 audited financial statements; and  the fiscal year 2003 approvals, payments, and other documentation  concerning the Cerro Grande program and submitted claims.
Finally, we selected a statistical sample from the population of all partial  and final claimed amounts approved for payment from August 28, 2002,  through June 30, 2003, to determine whether FEMA processed, approved,  and paid the Cerro Grande fire claims in accordance with its applicable  policies and procedures.
We selected a dollar unit (statistical) sample of 99 intervals representing 84  claims totaling $21,000,928 that were approved for payment from a  population of 1,868 reported partial and final claim amounts that had been  approved for payment from August 28, 2002, through June 30, 2003 (FEMA’s  cutoff date for the annual report to the Congress), 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.
In order to follow up on FEMA’s corrective actions to address our prior  year recommendations, as well as determine whether FEMA properly  reported claim payment information to the Congress, we reviewed  OCGFC’s reconciliations of claimed amounts that were approved by  OCGFC for payment from its payment approval system and the actual  claim payments made by FEMA’s Disaster Finance Center (DFC) and  reported in FEMA’s accounting system.
Our work was conducted in Denton, Texas, and Washington, D.C., from  September 2003 through October 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  or his designee.  The Director of the Recovery Division of the Department  of Homeland Security’s Emergency Preparedness and Response  Directorate provided written comments on our draft, which are reprinted  in appendix I.  We discuss the written comments in the “Agency Comments  and Our Evaluation” section of this report.
section_title: Policies and Procedures for Claim Processing Were Followed
paragraphs: Based on the results of our statistical testing, FEMA processed, approved,  and paid its claims in accordance with its guidelines that were established  and in place at the time the claims were reviewed and processed.  FEMA’s  guidelines for the approval and payment of claims specify the following  steps.
An injured party submits a Notice of Loss (NOL) to OCGFC to initiate  the claim payment process.
Upon receipt of the NOL, a claim reviewer contacts the claimant to  discuss the claim, explain the claims process, and determine the best  means to substantiate the loss or damages.
The claim reviewer then assigns a claim number and enters the  information into OCGFC’s claim-processing database, the Automated  Claim Information System, and begins the process of verifying the  victim’s claim.
Upon completion of its review, the claim 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 that he/she expects to be paid into the claim- processing database.
A claim supervisor reviews to ensure that a proper investigation of the  claim occurred and that the proper documentation exists, among other  things, and approves each recommendation package.
Upon 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 Comptroller receives a Schedule of Payments, consisting of  amounts approved for payment, and reviews a sample of requested and  approved payments.
The Comptroller then approves the Schedule of Payments, records the  approved amounts in OCGFC’s payment approval system, and sends the  schedules to FEMA’s DFC for additional manual processing.
FEMA records all payments in its accounting system, the Integrated  Financial Management Information System,  which is not linked to  OCGFC’s payment approval system, before funds are disbursed by  Treasury.
In addition to the above steps from the claim review process, which is used  for both partial payments and final payments, the claim reviewer prepares  a Proof of Loss (POL) form prior to processing a final payment.  This form  summarizes all amounts recommended for payment, including those  amounts previously paid through a partial payment.  The POL 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 POL  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.  Upon  receipt of the signed Release and Certification form, FEMA processes and  mails a claimant’s final payment.
Our review of the statistically selected sample of approved claims  determined that the above steps were performed in accordance with  FEMA’s established approval and payment process.  For the period from  August 29, 2002, through June 30, 2003, FEMA approved claims in the  amount of $40 million for payment, including the partial payment of  approved subrogation claims filed by insurance companies.
section_title: Progress Made in Addressing Prior Recommendations, but Reporting Could Be Improved
paragraphs: FEMA addressed our prior recommendations related to reconciling the  reported amounts approved for payment to amounts actually paid.  FEMA  reconciled the total amounts approved for payment to the amounts actually  paid as of June 30, 2003, which was the cutoff date for its annual report,  and as of August 31, 2003.  FEMA officials stated they would continue to  perform these reconciliations periodically.  In reviewing FEMA’s annual  report to the Congress required by CGFAA, we found that while  improvements were made in how FEMA represented the detailed claim  information in its report, claim information was no longer summarized in  the report, making it less useful and transparent.
In our May 2003 report, we recommended that FEMA reconcile the  amounts approved for payment in its payment approval system to amounts  actually paid in its accounting system and correct all identified errors in its  payment approval system.  We also recommended that FEMA perform  monthly reconciliations of the approved and paid amounts for as long as  both systems are used to track and report paid amounts or request  additional funding.
In response to our recommendations, OCGFC implemented a detailed  process that consisted of compiling the claimed amounts by individual  claims from both the accounting system and the payment approval system  and matching the amounts approved and paid for each claim.   It also  performed an overall reconciliation of the total amounts approved and paid  through June 30, 2003.
In performing the detailed matching process, OCGFC compared the  individual claim approval data and claim payment data from August 28,  2000, through February 19, 2003, and performed periodic comparisons of  individual claims from February 20, 2003, to May 31, 2003, and from June 1  to June 30, 2003.  When OCGFC identified differences between amounts  reported as paid by FEMA’s accounting system and OCGFC’s payment  approval system, it recorded the adjustments and corrections into its  payment approval system to eliminate duplication and made note of data  entry errors, which did not require adjustments.  The identified differences  generally consisted of the following:  Duplicate approved amounts that represented a claimed amount that  was approved for payment more than once.  For example, in one case  OCGFC approved a final payment of $934,802.  Since the claimant  appealed, the amount was not paid.  While the claim was being  appealed, OCGFC approved a partial payment of $919,802.   Both of  these amounts appeared as approved payments in its payment approval  system.   After we brought this duplicate approval to OCGFC’s attention  during our prior review, it subsequently removed the original unpaid  amount from its system during its claims comparison process later in  fiscal year 2003.
Data entry errors by claim reviewers when entering data into the  payment approval or accounting systems.  For example, if an incorrect  identification number was used to process a payment, no comparison  could be made between the approved amount recorded by claim  number in the approval system and the paid amount recorded by  claimant’s identification number in the accounting system.  To resolve  the situation, OCGFC listed the approved amount as an unmatched item  until it located the matching payment that was recorded to a different  identification number.
In addition to these comparisons of individual claim amounts, FEMA’s  Financial and Acquisition Management Division (FAMD) performed a  complete reconciliation of the total amounts that were approved for  payment and paid as of June 30, 2003.  We reviewed this overall  reconciliation of the total claim amounts approved and paid under CGFAA,  from inception through June 30, 2003, and found that all corrections and  adjustments identified during OCGFC’s comparison were made.  FAMD  also performed a similar reconciliation of total approved and paid amounts  through August 31, 2003, and stated that it plans to perform this overall  reconciliation more regularly, at least quarterly.
In our prior report, we noted that FEMA improperly reported unreconciled  amounts that were approved for payment in its prior annual reports to the  Congress as amounts actually paid.  In its 2003 annual report to the  Congress, FEMA continued to include claimed amounts approved for  payment in a detailed schedule of claim information, but it properly  identified the amounts as such instead of as paid or expended amounts.   However, FEMA’s report no longer summarized information on the  amounts claimed, amounts approved, and the estimated liabilities for the  remainder of the program.  In addition, FEMA did not include any  information on claims paid as is required under CGFAA.  Without this  information, FEMA’s annual report is less useful to the Congress and other  stakeholders.
section_title: Conclusions
paragraphs: FEMA strengthened its internal controls over its claim approvals and  payments by implementing a process to reconcile its detailed approval  information to its payment information.  This helps improve the accuracy  of claims information included in its systems and reports to the Congress.   The usefulness and transparency of the report would be further improved if  it included summary claim activity information.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of Homeland Security direct the Under  Secretary of the Emergency Preparedness and Response Directorate to  include summary-level claim information in its annual report to the  Congress, including amounts claimed, approved, and paid and remaining  estimated program liabilities.
section_title: Agency Comments
paragraphs: FEMA, in a letter from the Director of the Recovery Division of the  Department of Homeland Security’s Emergency Preparedness and  Response Directorate, agreed with our recommendation to include  summary-level claim information on amounts claimed, approved, and paid  and remaining estimated program liabilities, if any, in its next annual report  to the Congress.  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  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.  In addition, this report is available at no  charge on GAO’s Web site at http://www.gao.gov.
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 contributors to this assignment were Christine Fant and Estelle Tsay.
section_title: Comments from the Department of Homeland Security
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