The Realities of Building an LCSA Budget

and other Fun Fiscal Topics

Introduction / Overview

1 Government Accounting

2 CA State Overview

3 Building a Budget

4 Internal Control

5 Fraud

6 Cash Handling

7 Cost Allocation

Government Accounting1

Why Account?

Method of recording transactions

System of keeping financial records

Way of performing internal audits

Aid in analyzing & managing resources

Preparation for calculating taxes due

Functional Financial Reports

Income Statement Balance Sheet(covers a period of time) (snapshot at one point in time)

Revenue AssetsExpense Liabilities

Statement of Cash Flows

Basics of Accounting Timing Cash Accrual Modified Accrual

Accountability Paramount objective of

financial reporting for government

Fiscal accountability Operational Accountability

Four Accounting Principles• Cost – money talks• Accrual – transactions can occur before money changes

hands• Matching – costs and results put in the same time frame• Disclosure – be as comprehensive as possible

Four Accounting Assumptions• Business Entity – there are discrete units of accounting• Going Concern – business is expected to continue• Monetary Unit – things can be measured in local currency• Time Period – transactions need to be properly slotted

Four Accounting Constraints• Objectivity – measurable• Materiality – significant• Consistency – comparisons are valid• Prudence – don’t overstate!

Fiscal Accountability

“The responsibility of governments to

justify that their actions in the current

period have complied with public

decisions concerning the raising and

spending of public moneys in the short

term (usually one budgetary cycle or one

year)”

Operational Accountability

“Governments’ responsibility to report the

extent to which they have met their

operating objectives efficiently and

effectively, using all resources available

for that purpose, and whether they can

continue to met their objectives for the

foreseeable future”

Key Environmental Characteristics

Different financial objectives for different activities

Covering cost (business-type activities)

Covering expenditures (governmental activities)

Fiscal accountability

Annual appropriated budget has force of law

More than just a financial plan

Users of Financial Information

ManagementNot a “primary” user of external

reports

Legislative and oversight bodies

Investors and creditors

Citizens

The Governmental Environment

FinancingFederal – income tax

State – income tax/sales tax/vehicle fees

Local – property tax/sales tax/transfer payments/user

charges/fees/fines/permits

Fund Categories (3)

GovernmentalTax-supported activities

ProprietaryBusiness-type activities

FiduciaryResources held as trustee or agent for outside parties and unavailable for

programs

County Budget Book

County Comprehensive Annual Financial Report

CA State Overview2

Have you ever wondered how…

The child support program fits into state government?

The state budget process works?

Child support program funding is spent in California?

California child support compares to other states?

Executive BranchHeaded by the Governor and the elected Constitutional Officers

Governor oversees all agencies and departments and many boards and commissions that are not overseen by the Constitutional Officers.

Executive Branch (continued)

The portion of state government that the Governor oversees is organized into agencies.

The “Governor’s Cabinet” is comprised of 12 Agency Secretaries that are appointed by the Governor.

The Cabinet serves as the Governor’s chief policy advisory body. Each implements the Governor’s policies throughout the state.

More than 60 departments, boards, and commissions report to the Agency Secretaries.

The Department of Child Support Services (DCSS) is part of the California Health and Human Services Agency (CHHS).

CHHSCHHS oversees 13 departments and other state entities, including the DCSS.

CHHS programs provide a range of services including:

Health Care and Public HealthSocial ServicesMental HealthAlcohol and Drug TreatmentIncome AssistanceChild Support

More than 33,000 people work directly for CHHS and its departments and regional facilities throughout the state.

Budget ProcessQuick Facts

The state fiscal year runs from July 1 through June 30.

The federal fiscal year runs from Oct. 1 through Sept. 30.

Each budget cycle focuses on two fiscal years:Current year – non-discretionary updates onlyBudget year – future year budget proposal

Legal authority to spend money in any fiscal year is provided by the annual State Budget Act.

Budget Responsibility

Development of the annual budget is a shared responsibility.

At the lowest level, each department is responsible for developing and submitting budget proposals and cost estimates for the department and the program(s) it oversees.

Agencies are responsible to communicate the Governor’s priorities to the departments and to approve or deny departmental requests based on those priorities. Approved requests are forwarded to the Department of Finance.

Responsibility – Department of Finance (DOF)

Approved proposals and requests are published in the Governor’s January proposal and May revision.

The Governor’s Budget proposal is released each year on or about January 10.

The May Revision is released each year on or about May 15.

The DOF acts as the financial arm of the Governor’s office, providing instruction and oversight for the budget process. All budget proposals and requests are analyzed and either approved or denied by the DOF.

Responsibility – Legislative Analyst’s Office (LAO)

The LAO serves as the “eyes and ears” of the Legislature.

Ensures legislative policy is implemented in a cost efficient and effective manner

Reviews and analyzes budget proposals and the state’s finances

Makes recommendations for legislative action

Responsibility – LegislatureThe Legislature uses the Governor’s budget proposals as a starting point for budget bill discussions and negotiations.

The Legislature determines which proposals will be included in the final budget.

Responsibility – Governor

Once both houses of the Legislature agree and pass the budget bill, it goes to the Governor for final approval or veto.

The Governor may approve the budget bill “as is” or with changes (line-item veto).

Once signed by the Governor, the

Budget Bill becomes… The Budget Act

California Revenues vs. Expenditures 1990-2014

$0.0

$20,000.0

$40,000.0

$60,000.0

$80,000.0

$100,000.0

$120,000.0

Revenue

Expenditures

(in thousands)

National Competition for Funding

DCSS Budget

State OperationsDCSS’ state operations budget includes funding for:

CSE ($76 M)

Judicial Council of California (JCC) contract ($55 M)

State staff (salaries, benefits) and operating expenses & equipment ($50 M)

Office of State Publishing contract ($18 M)

State Disbursement Unit SDU ($15 M)

Locate, SLMS, Fair Hearing & Intercept contracts ($8 M)

Federal costs including IRS intercept fees ($8 M)

Budget Development

The Budget Support Section is responsible for

for all aspects of the child support program.

Requesting budget authority

Submitting proposals

Projecting costs

Allocations to Counties

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

0 10 20 30 40 50 60

"Equity"

Dollars Per Case

Counties

County Allocation Cases FTEs $ / Case Cases/FTEAlameda 25,768,079$ 34,067 218 756$ 156 Butte 8,773,650$ 11,941 97 735$ 123 Central Sierra 4,940,779$ 6,292 49 785$ 128 Colusa 682,320$ 793 6 860$ 132 Contra Costa 18,331,644$ 30,582 153 599$ 200 Del Norte 2,249,141$ 2,939 18 765$ 163 Eastern Sierra 1,389,595$ 1,575 8 882$ 197 El Dorado 4,747,119$ 6,277 53 756$ 118 Fresno 21,582,116$ 60,423 203 357$ 298 Glenn 790,733$ 1,776 9 445$ 197 Humboldt 5,151,250$ 6,793 46 758$ 148 Imperial 3,379,746$ 11,530 54 293$ 214 Kern 21,570,320$ 54,856 188 393$ 292 Kings 4,133,667$ 10,072 54 410$ 187 Lake 2,638,737$ 2,895 28 911$ 103 Lassen 1,038,022$ 1,744 12 595$ 145 Los Angeles 142,439,904$ 301,016 1,575 473$ 191 Madera 2,842,396$ 6,546 37 434$ 177 Marin 3,645,241$ 3,038 24 1,200$ 127 Mariposa 702,443$ 708 7 992$ 101 Mendocino 3,027,196$ 4,918 27 616$ 182 Merced 9,376,887$ 17,679 79 530$ 224 Monterey 10,810,930$ 17,391 100 622$ 174 Napa 4,021,777$ 4,109 33 979$ 125 Orange 53,577,509$ 71,201 579 752$ 123 Placer 6,030,975$ 9,303 43 648$ 216 Plumas 840,066$ 1,022 8 822$ 128 Riverside 33,892,513$ 88,837 333 382$ 267 Sacramento 31,873,986$ 80,616 318 395$ 254 San Bernardino 38,143,911$ 116,395 404 328$ 288 San Diego 45,234,076$ 79,931 469 566$ 170 San Francisco 12,037,393$ 14,249 90 845$ 158 San Joaquin 14,489,029$ 35,251 165 411$ 214 San Luis Obispo 4,439,121$ 4,457 41 996$ 109 San Mateo 11,171,638$ 11,576 85 965$ 136 Santa Barbara 8,971,916$ 14,189 83 632$ 171 Santa Clara 35,538,529$ 40,961 300 868$ 137 Santa Cruz/San Benito 8,362,558$ 8,833 74 947$ 119 Shasta 7,318,853$ 12,993 81 563$ 160 Sierra-Nevada 4,051,547$ 3,918 26 1,034$ 151 Siskiyou/Modoc 2,850,267$ 3,763 25 757$ 151 Solano 11,874,641$ 18,399 104 645$ 177 Sonoma 14,025,304$ 13,188 96 1,063$ 137 Stanislaus 14,707,908$ 30,615 153 480$ 200 Sutter 2,969,638$ 5,236 28 567$ 187 Tehama 1,828,711$ 4,375 21 418$ 208 Trinity 675,774$ 798 7 847$ 114 Tulare 15,563,451$ 28,579 169 545$ 169 Ventura 20,014,027$ 21,089 193 949$ 109 Yolo 5,743,171$ 8,334 54 689$ 154 Yuba 3,883,527$ 4,612 36 842$ 128

Total / averages 714,143,731$ 1,332,680 7,063 536$ 189

Diversity Across Counties

One BudgetTwo Categories

For statewide tracking purposes, the DCSS budget is divided into two main categories:

1 State Operations

2 Local Assistance

Building a Budget3

Political Environment

Public attitude toward governmentOpposed to increased taxesWant more effective services at lower

costPublic salaries and pensions are too

high

Local political environmentTerm limits and pending electionsInfluence of organized laborDifficult decisions now and in the

future

Budget Status of LCSAs

Fully funded by State with (generally) no County General Fund contribution, but expected to participate in countywide budget reduction strategies.

County Budget Balancing Strategies

Hiring freezeFurloughsMid-year adjustmentsProgram reductions – Targets for FYLabor negotiations – salaries & benefitsRevenue enhancementOther steps?

Practical Considerations

What makes an LCSA budget unique? Labor contracts negotiated by County,

but State/Federal funded Classification management/position

control How to look at cuts/strategies Politics of the process No reserves Cash basis, no fund balance or

carryover

Melding the State, County and DCSS Budget Process

Budget

Process

County

State

DCSS

County Budget TimelineRevenue forecasts – early winter

Budget instructions – first of the calendar year

Meeting with CAO – early spring

Budget hearings – June

New fiscal year begins July 1

Final budget - September

LCSA Budget TimelineNew fiscal year begins July 1

Year-end close for prior fiscal year – July/Aug

Adopt final budget for new fiscal year – Sept

1st Quarter CS 356 Claim – due Oct 15

CS 921 Budget Display - winter

LCSA Budget Timeline (continued)

Mid-year analysis due to CAO – January

2nd Quarter CS 356 Claim – due January 15

Program Plan/Budget narrative due to CAO – Feb

Preliminary Allocation Letter – Feb/Mar

LCSA Budget Timeline (continued)

LCSA Budget Development – in progress Feb/Mar/Apr

3rd Quarter CS 356 Claim – due April 15

Year-end Analysis due to CAO – April

County Budget due (BY & BY +1) – April

LCSA Budget Timeline (continued)

EDP Budget Display – spring

Gear up for year-end closing (again…)

4th Quarter Claim – due July 15

Year-end close – July/August

And the cycle continues…

Don’t for get about Performance Measures during the Fiscal Year!

Unique Aspects of LCSA Budget

Revenue Sources – 66/34 split

Connection to State BudgetCounty target vs. State Budget

process

Potential level of CAO scrutinyGood & Bad

Possibly different COLA assumptions

Bottom line: A Balanced Budget!!!

Budgeting Tips

Own Your Budget

Be prepared – analysis and due diligence

Be proactive – take control of your budget problems

Propose solutions/recommendations

LCSA fiscal staff development

Develop your relationship with your CAO Budget Analyst

Budgeting Tips (continued)

Connect Budget and Performance

Be realistic about service impacts

Take credit for improvements and efficiencies

Quantify impacts and clearly communicate them

Use your performance to establish credibility

Be creative

Relationship with CAO Budget AnalystEducate your analystdepartment background & overview

Keep analyst informed and in the loopemail and cc:

Set expectations

Define rolesdepartment advocate

Establish mutually beneficial relationship

Be Nice!

More Budget Strategies…

Annual Strategic Planning Process

Automation/Technology projectsOne-time investments that yield long-term

savingsExamples

Review service chargesDirect vs. indirect costs

Spend 100%!Understand the componentsConsider your lead time

EDP Recurring & Non-Recurring Funding

Annual LCSA letter requesting budget data

Submit via EDP web form

M&O fundingCurrent needHistorical trend

Non-recurring fundingNew non-recurring projectsLCSAs submit requests in January

Local Perspective - EDP

Things to watch

Local definitions of EDP vs. State definitions

Local charges usually more detailed

Timing issues

Staffing and overhead

Prior Approval Requirements

Administrative and EDP

Policy in CSS Letters 04-20 and 05-05

All automation products and services planned for purchase using EDP or Administrative non-EDP funds

• including personal computers, servers, printers, integrated voice response units, imaging systems, new and existing software, and web contracting services

Administrative and EDP Claim Processes (CS 356)

Federal requirement to:Report expenditures

Expenditure data used:Reconcile funds advanced to

LCSAsTo determine future fundingFor various internal reports

Administrative and EDP Claim Processes (CS 356)

Laws and RulesOMB Circular A-133OMB Circular A-87CFR Part 45, Section

92.25(b)Family Code 17714(b)

Administrative and EDP Claim Processes

Submit quarterly claim 15 days after the end of the quarter

Time certify vs. Time studyTime certify when staff are working 100%

on one activity or functionTime study when staff are spending time

on two or more activities or functions

In the mid-month of quarters one and four(August and February)

Local Perspective - Claims

Quarterly process

Track expenses ongoing

Categorize EDP expenses by claim numbers

Remember cash basis accounting

Less detail than CS 921

Different detail than CS 921

DepreciationTitle 45 CFR, Section 95.705(a)

AT 94-5

LCSA Letter 05-24

CSS Letter 04-20

Approved to purchase

Recover costs over five years

Depreciation

Non-EDP EquipmentPurchase price over $25,000

Depreciate/claim over five yearsEquipment cost $60,000 ($60,000/5)

Year 1 claim $12,000Year 2 claim $12,000Year 3 claim $12,000Year 4 claim $12,000Year 5 claim $12,000

Depreciation

EDP EquipmentPurchase price over $5,000

Depreciate/claim over five years

Including EDP equipment purchased with Admin (Non-EDP) fundsExample: Training room PCs

Local Perspective – Depreciation

Understand the asset

County “float”

Disposition of Assets

For Policy: CSS Letter 04-20 and LCSA Letter 05-19

Determine fair market value

Notify DCSS of disposal

Retain supporting documentation for four years and four months

Consider recycling

Disposition of Assets

Under $5,000

LCSAs may transfer, sell, dispose using county rules

Proceeds must be abated as program income on administrative expense claim

Disposition of Assets

Over $5,000

Transfer equipment

Sell equipment: Proceeds must be abated

Dispose of equipment using county rules

Overhead/Indirect Costs(aka A-87 or Countywide Cost Allocation Plan)

Claim State Controller’s Office approved amount only

Should claim ¼ of the annual cost on quarterly expense claim

Can split overhead costs with EDP

An exception to cash basis claiming rule

POC/MOU Requirements

Title 45 CFR 303.107 for fiscal portion

Agreements should include:

Budget estimates

Covered expenditures

Methods of determining costs

Procedures for billing IV-D agency

Local Perspective

Go through your county review processCounty Counsel

Monitor for renewalTimeframes can be different

When costs change – amendMust go through your county

process

Audits

Authority

OMB A-87 and A-133

CFR 302.10 and 302.14

CSS Letter 04-20

LCSA Letter 05-09 • History and process in this letter

Audits

Keep supporting documentation for at least four years and four months

Two (of six) most common audit findings

• Accrual vs. cash basis accounting

• Income or program income not abated on Administrative Expense Claim

Local Perspective

Get used to audits

Retain backup for required timeframe

Keep findings

Scope of work

InternalControl4

What are internal controls?Internal controls should be applied to your personal life as well as to business entities.

Personal internal controls are activities you should perform in order to safeguard and protect your assets (cash, investments, valuables, tax records, identity, etc.) from potential loss.

Examples of personal control activities: Balance your checkbook Keep valuables in a secure, locked area Keep orderly files (tax returns, bank

statements, receipts, etc.) Shred documents containing personal,

identifying information if no longer needed

Authoritative Guidance

The American Institute of Certified Public

Accountants (AICPA) identified minimum

standards governing the formatting and

contents of external financial reports for the

public and private sector, referred to as

generally accepted accounting principles

(GAAP). These practices govern and dictate

what aspects of our program should be

audited.

Authoritative Guidance(continued)

SINGLE AUDIT – annual audit of

government’s federal award programs

Auditors must issue report on internal

controls over compliance and have strict

reporting requirements when compliance

issues related to internal control occur.

GFOA Code of Ethics

Finance officers must:

“…exercise prudence and integrity in the

management of funds in their custody

and in all financial transactions.”

“…not knowingly sign, subscribe to, or

permit the issuance of any statement or

report which contains any misstatement

or which omits any material fact.”

Relationship to Internal Control

Prudence in the management of public

funds

Requires adequate controls in place to

protect

Avoidance of misstatements or the omission

of material facts

Requires sound framework of internal

control to provide a reasonable basis for

assertions

How Achieved

• Management competence

• Staff competence

• Internal control documentation

• Periodic evaluation of internal

control

• Corrective action plan following

periodic evaluation

Management’s Mission and Objectives

All organizations have a purpose/mission

Key managerial objectives arising from management’s mission:

Effectiveness Efficiency Compliance Stewardship reporting

Elements of a Comprehensive Framework of Internal Control

Favorable control environment

Continually assesses risk (risk assessment)

Establishes and maintains effective control related policies and procedures

Effectively communicates information

Monitors the effectiveness of control-related policies and procedures

Favorable Control Environment

• Management is knowledgeable about controls

• Management is committed to establishing and maintaining controls

• Management communicates support to staff at all levels

• Management provides needed resources

Management Communication

• Code of conduct/official policies

• Communicated to staff at all levels

In a practical way

Reinforced periodically

• Communicated to managers at all levels

• Swift and appropriate disciplinary action

Risk Assessment

Management need to anticipate risks

ExternalInternal

Ongoing process

Key Risk IndicatorsChange

Inherent risk characteristics

Change as an Indicator of Risk

Operating environment

Personnel

Information systems and technology

Rapid growth

New programs and services

Structure

Categories of Policies and Procedures

Authorization

Properly designed records

Security of assets and records

Segregation of incompatible duties

Periodic reconciliations

Periodic verifications

Analytical review

Segregation of DutiesAn individual should not be able to commit and conceal an irregularity

Separate incompatible duties

Authorization

Recordkeeping

Custody

Fraud

5

The Fraud TriangleThree Elements

RationalizationOpportunityJustification: Lack of:

“I need this…” Supervision“I’ll pay it back…” Review“My family needs this…” Management

approvalSystem controls

PressureFinancial pressuresPersonal vicesUnrealistic deadlines/expectations at work

Embezzlement Study

Apparent Motivation• Financial problems 4%• Gambling problem/addiction 27%• Desire to live lavishly 60%• Substance abuse 2%• Support a personal business 7%

Embezzlement Study

Age of the perpetrator

Average age 43 years old

Gender of the perpetrator

36% male 64% female

Cash Handling6

Risk

“When money passes through hands, sometimes

it sticks”Stephen Gauthier, GFOA

Cash carries a high risk of theft…

Temptation: most everyone desires money

Portable: physically small and lightweight, may be stolen discretely

Risk

Risk of Theft

2 basic categories of theft

Category 1 LARCENYstealing cash which has already been

recorded inthe books and records, such as cash in

the safe,cash in register, petty cash, deposits

Category 2 SKIMMINGstealing cash received directly, upon

receipt, before it is recorded ii the books and records

How to prevent/detect cash loss

Surveillance cameras Reconcile cash deposits to daily sales reports Two employees should be present whenever

cash is counted Deposits are safely and securely delivered to

the bank Armored car delivery Cash should be entered in the cash register

immediately when received Enter cash register transactions while customer

is present Issue receipts for all customer transactions

Segregation of DutiesCash duties which should be performed separately:

Cash receipts/collections

Cash deposits

Reconciliation of cash

Physical Security

Limit access to safe and cash drawers to authorized personnel.

Change safe combinations/keys when employees terminate or transfer.

Consider surveillance cameras.

Physical Security (continued)

Cash should not be left unattended at any time.

Cashiers must store cash in a locked, secure area with restricted access while away on break/lunch.

Cash left overnight should be secured in the safe until the next business day.

Cost Allocation7

Why a Cost Allocation Plan?

What is a Cost Allocation Plan?

• CAP

• CoCAP

• A-87

• Filed by the county with the State Controller’s Office (SCO) by Dec. 31 each year

• Desk-audited yearly, field audited periodically by SCO

Cost Allocation Plan and User Supplement

Rules

Office of Management and Budget Circular A-87

TimingTimeline of Cost Allocation Accounting

6/30 12/31 6/30 12/31 6/30 12/31 6/30

Costs occur in Central

Departments

X

Costs paidby non-General Fund programs

CAP due to state

Costs allocatedto non-General Fund program

General Services

Expense: RENTAllocation Basis

Square footage occupied

Potential IssuesMixing old and new buildingsUnfinished basement vs.

penthouse

Auditor

Expense: PAYROLLAllocation Basis

Number of employees

Potential IssuesSeasonal swings in numbersNumber of pay codes processedNumber of deductions

processed

Thank you!