PERFORMANCE AUDIT REPORT 100-Hour Audit

Transcription

1 PERFORMANCE AUDIT REPORT 100-Hour Audit Firefighters Relief Fund: Reviewing the Use of Fire Insurance Premium Taxes Distributed to Local Firefighters Relief Associations A Report to the Legislative Post Audit Committee By the State of Kansas

2 Legislative Post Audit Committee THE LEGISLATIVE POST Audit Committee and its audit agency, the Legislative Division of Post Audit, are the audit arm of Kansas government. The programs and activities of State government now cost about $9 billion a year. As legislators and administrators try increasingly to allocate tax dollars effectively and make government work more efficiently, they need information to evaluate the work of governmental agencies. The audit work performed by Legislative Post Audit helps provide that information. We conduct our audit work in accordance with applicable government auditing standards set forth by the U.S. General Accounting Office. These standards pertain to the auditor s professional qualifications, the quality of the audit work, and the characteristics of professional and meaningful reports. The standards also have been endorsed by the American Institute of Certified Public Accountants and adopted by the Legislative Post Audit Committee. The Legislative Post Audit Committee is a bipartisan committee comprising five senators and five representatives. Of the Senate members, three are appointed by the President of the Senate and two are appointed by the Senate Minority Leader. Of the Representatives, three are appointed by the Speaker of the House and two are appointed by the Minority Leader. Audits are performed at the direction of the Legislative Post Audit Committee. Legislators or committees should make their requests for performance audits through the Chairman or any other member of the Committee. Copies of all completed performance audits are available from the Division s office. LEGISLATIVE POST AUDIT COMMITTEE Representative John Edmonds, Chair Representative Tom Burroughs Representative Bill McCreary Representative Frank Miller Representative Dan Thimesch Senator Derek Schmidt, Vice-Chair Senator Bill Bunten Senator Anthony Hensley Senator Dave Kerr Senator Chris Steineger LEGISLATIVE DIVISION OF POST AUDIT 800 SW Jackson Suite 1200 Topeka, Kansas Telephone (785) FAX (785) LPA@lpa.state.ks.us Website: Barbara J. Hinton, Legislative Post Auditor The supports full access to the services of State government for all citizens. Upon request, Legislative Post Audit can provide its audit reports in large print, audio, or other appropriate alternative format to accommodate persons with visual impairments. Persons with hearing or speech disabilities may reach us through the Kansas Relay Center at Our office hours are 8:00 a.m. to 5:00 p.m., Monday through Friday.

3 LEGISLATURE OF KANSAS LEGISLATIVE DIVISION OF POST AUDIT 800 SOUTHWEST JACKSON STREET, SUITE 1200 TOPEKA, KANSAS TELEPHONE (785) FAX (785) April 25, 2003 To: Members, Legislative Post Audit Committee Representative John Edmonds, Chair Representative Tom Burroughs Representative Bill McCreary Representative Frank Miller Representative Dan Thimesch Senator Derek Schmidt, Vice-Chair Senator Bill Bunten Senator Anthony Hensley Senator Dave Kerr Senator Chris Steineger This report contains the findings, conclusions, and recommendations from our completed performance audit, Firefighters Relief Fund: Reviewing the Use of Fire Insurance Premium Taxes Distributed to Local Firefighters Relief Associations. The report also contains an appendix showing the amounts distributed to local Firefighte-rs Relief Associations in 2001, and the amounts they spent. In some cases the associations have more expenditures than their distribution amount received, because they have other sources of income, like interest earnings. The report includes several recommendations for updating the Firefighters Relief Associations Handbook, and strengthening the procedures the legal staff uses to bring associations into compliance. We would be happy to discuss these recommendations or any other items in the report with any legislative commit-tees, individual legislators, or other State officials. Sincerely, Barbara J. Hinton Legislative Post Auditor

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5 EXECUTIVE SUMMARY LEGISLATIVE DIVISION OF POST AUDIT Overview of the Firefighters Relief Fund Moneys collected under the Firefighters Relief Fund Act of 1895 initially were to be used as prizes for efficient, well-drilled, and skilled fire companies belonging to the association and competing at an annual State tournament of the association. Since then, the Act has been amended numerous times, and currently is used primarily for the financial relief of firefighters, and their dependents, when they have been injured or killed in the line of duty. Question 1: How Much Money Currently Is Being Distributed to Local Firefighters Relief Associations, and How Fast Has the Amount Distributed Grown? The Firefighters Relief Fund is financed by a 2% tax on all fire and lightning premiums collected by insurance companies doing business in Kansas. Part of the money goes to the State Firefighters Association for education and death benefits. Part goes to the Insurance Department for administration of the Fund. The rest goes the local firefighters relief associations to provide benefits to their members.... page 2 Question 2: How Are Local Firefighters Relief Associations Spending The Moneys They Receive from the State s Collection of Insurance Premium Taxes, and Are Those Uses Allowed by State Law? In 2002, just over $6.3 million was available for distribution to local firefighters relief associations. The total amount credited to the Fund in 2002 was $6.6 million, and $6.3 million was earmarked for distribution to the local associations. Not all of that money was distributed because the Insurance Commissioner is required to withhold payment from relief associations that fail to comply with requirements of the Act. Both State law and the Insurance Department regulations govern how Firefighters Relief Fund moneys can be spent. Current law allows moneys distributed from the Firefighters Relief Fund to be spent for financial relief for firefighters who are injured or physically disabled on the job, death benefits or funeral expenses for firefighters who are killed on the job. It also allows pensions for retired firefighters who have provided at least 20 years of service, annuities for volunteer firefighters with at least 20 years of service, and insurance that would provide for any of the previously mentioned benefits. Insurance Department regulations allow certain administrative expenses.... page 3... page 5 EXECUTIVE SUMMARY i

6 State Law and Insurance Department procedures provide a good system for helping to ensure that firefighters association expenditures conform to the law. State law requires treasurers of associations to be bonded, moneys received from the Firefighters Relief Fund to be kept in a separate account, annual financial reports to be provided to the Insurance Department, and all expenditures over $1,500 to be approved in writing by the governing body s attorney.... page 6 The Insurance Department distributes handbooks explaining the requirements for these moneys and periodically trains those who handle the money for the associations. It requires the associations to include itemized statements of expenditures and copies of bank statements with their annual financial reports, and it has assigned an employee to review the documents the associations submit. The Department also requires the associations to obtain to obtain prior approval from the Kansas State Firefighters Association before purchasing computers or paying salaries to treasurers of the relief associations. Finally, it withholds funding from those associations that don t file the required reports or don t otherwise comply with the requirements of the Firefighters Relief Act. Expenditure reports show that local associations spent $7.6 million in 2001, mostly on insurance and annuity premiums and other financial benefits for firefighters. Those expenditures included about $5.4 million for insurance premiums, about $919,000 for relief payments to firefighters who were injured on the job or to surviving dependents of firefighters who were killed. Another approximately $1 million was for pension and annuity payments or annuity premiums. The remainder was spent primarily on administrative expenses such as compensation to the treasurers of associations, accounting and legal fees, and the like. Our review of expenditures showed that associations need to improve documentation and that the Department needs to provide better follow-up. We reviewed records for a sample of 54 firefighters relief associations that had filed reports for the 2001 calendar year. Here s a summary of what we found:... page 6... page 8 6 of the 54 associations didn t submit sufficient documentation that would allow us or Insurance Department staff to know what was included in expenditures they classified as relief payments or other. 5 of the 54 associations we reviewed spent money on things that weren t allowed by law or Insurance Department regulations. Those included such things as flowers and uniforms and conference registrations. All but one of these expenditures had been caught by the Department and recoupments were either made or were in process at the time of this audit. 17 of the 54 associations we reviewed spent more than the amount approved for staff salaries or computer purchases, or didn t get the required approvals before spending the money. ii EXECUTIVE SUMMARY

7 The Department s Guidance in Some Areas Needs to be improved. We noted that the handbook the Department provides to relief associations needed to be updated in several areas. First, it needs to include information about the procedures for getting approval for paying treasurers salaries or purchasing computer equipment. We found no reference to the procedures Department officials described to us in the current handbook. Second, the handbook needs to include examples of what the Department considers acceptable documentation for expenditures. Finally, an internal audit at the Department noted that a recent statutory change hadn t been incorporated into the handbook. Conclusion Recommendations APPENDIX A: Scope Statement APPENDIX B: Firefighters Relief Associations APPENDIX C: Agency Response... page page page page page page 19 This audit was conducted by Carol Porter. Leo Hafner was the audit manager. If you need any additional information about the audit s findings, please contact Ms. Porter at the Division s offices. Our address is:, 800 SW Jackson Street, Suite 1200, Topeka, Kansas You also may call us at (785) , or contact us via the Internet at LPA@lpa.state.ks.us. EXECUTIVE SUMMARY iii

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9 Firefighters Relief Fund: Reviewing the Use of Fire Insurance Premium Taxes Distributed to Local Firefighters Relief Associations In fiscal year 2002, the Insurance Department collected more than $6.7 million in fire insurance premium taxes to fund the Firefighters Relief Fund. These funds are distributed primarily to local firefighters relief associations to provide financial relief for injured or disabled firefighters and payment of death benefits, funeral expenses, pensions, and insurance premiums. Legislators have expressed concerns about how local firefighters relief associations are spending the moneys they receive from the State s collection of fire insurance premium taxes, and whether those uses are consistent with the uses authorized by State law. To address those concerns, this performance audit answers the following questions: 1. How much money currently is being distributed to local firefighters relief associations, and how fast has the amount distributed grown? 2. How are local firefighters relief associations spending the moneys they receive from the State s collection of insurance premium taxes, and are those uses allowed by State law? To answer these questions, we interviewed Department officials and reviewed applicable records to determine how much had been distributed from the Fund during the 5 most recent fiscal years, and what factors had contributed to any changes. We also reviewed State law to identify allowable uses of these moneys, and determined what guidance the Department provides to local firefighters relief associations in spending their relief moneys. In addition, we determined what oversight the Department performs of those expenditures, and reviewed the results of work conducted by the Department s internal audit staff. Finally, for a sample of local firefighters relief associations we reviewed supporting documents on file at the Insurance Department to determine what they spent their funds on, and whether those expenditures were consistent with the requirements of law. A copy of the scope statement for this audit approved by the Legislative Post Audit Committee is included in Appendix A. In conducting this audit, we followed all applicable government auditing standards. PERFORMANCE AUDIT REPORT 1

10 Question 1: How Much Money Currently Is Being Distributed To Local Firefighters Relief Associations, and How Fast Has the Amount Distributed Grown? The Firefighters Relief Fund is financed by a 2% tax on fire and lightning insurance premiums collected by insurance companies doing business in Kansas. The July 2002 distribution to local firefighters relief associations totaled about $6.3 million, up 22% over the nearly $5.2 million distributed the previous year. Insurance Department officials told us this jump was caused by increases in rates for fire and casualty policies in Kansas. They said they expected a similar increase for 2003, which would result in an estimated $7.6 million being distributed to firefighters relief associations in July These and other findings are described in the sections that follow. The Fund is Financed by a 2% Tax On All Fire and Lightning Insurance Premiums Collected for Coverage Sold in Kansas The tax which is due by April 1 each year based on insurance premiums collected the previous calendar year is collected by the Insurance Department and deposited into the Firefighters Relief Fund. Those moneys are to be distributed as follows: 3% to the State Firefighters Association for fire-related education and study 5% to the State Firefighters Association for death benefits, subject to a statutory maximum $1,000 to each local firefighters relief association an amount for administrative costs of the Insurance Department as appropriated by the Legislature the remainder (which is most of the Fund) is distributed to local firefighters relief associations based on a statutory formula that uses the associations populations and assessed valuations of the service areas covered In 2002, 581 firefighter relief associations were eligible to receive money from the Fund. Members of any qualified fire department may participate in the distribution of moneys from the Firefighters Relief Fund. Fire departments that wish to participate must: be chartered and incorporated as not-for-profit corporations provide evidence to the Insurance Commissioner that they represent established fire districts within a township or county in accordance with Kansas law complete and submit annual forms signed by the chief executive officer of the city, township, county, or fire district declaring their right to participate 2 PERFORMANCE AUDIT REPORT

11 submit a certification by the county clerk of the population and assessed tangible property valuation of the geographic areas served by the fire department adopt bylaws to cover all activities of the association and file them with the Commissioner As Table I-1 shows, 581 firefighter relief associations were participating in the Fund at the time the most recent distributions were made in July That number has stayed fairly constant since The table also shows that associations may include paid firefighters, volunteer firefighters, or a combination of both. In 2001, there were 2,749 paid firefighters in these associations, and 12,504 volunteer firefighters. Although the total number of participating associations has stayed constant, the total number of firefighters in those associations has declined slightly during the same time period. Table I-1 Number of Firefighter Associations Participating in the Firefighters Relief Fund Program 2001 # of Associations with Paid Firefighters Only 19 # of Associations with Volunteer Firefighters Only 459 # of Associations with Both Paid and Volunteer Firefighters 87 # of Associations that haven t filed their report 16 Total Firefighter Associations 581 Source: Kansas Insurance Department In 2002, Just Over $6.3 Million Was Available for Distribution to Local Firefighters Relief Associations Each year the total amount of money credited to the Firefighters Relief Fund as of July 1 must be distributed according to the provisions of State law described earlier. The total amount credited to the Fund in fiscal year 2002 was $6.7 million. As Table I-2 shows, about $6.3 million of that amount was earmarked for distribution to local firefighters relief associations. Not all of that money was distributed because, as noted in question 2 of this report, the Insurance Commissioner is required to withhold payment from relief associations that fail to comply with requirements of the Firefighters Relief Act. As of February 28, 2003, more than $108,000 was being withheld from more than 30 firefighter relief associations for failing to correct problems Insurance Department officials had noted in their financial reports including failure to file a report. PERFORMANCE AUDIT REPORT 3

12 Table I Distribution of Firefighters Relief Fund Moneys Distributions to Local Firefighters Relief Associations $1,000 to each local association $581,000 % distribution to local associations (statutory formula applied to Fund balance after all other distributions have been made) $5,737,507 Subtotal $6,318,507 State Association Distributions Distributions to the Kansas State Firefighters Association 3% for fire-related education and study $201,250 5% for death benefits $96,600 Subtotal $297,850 Department of Insurance Distribution Distributions to the Insurance Department Amount appropriated for administrative costs $92,000 Subtotal $92,000 Total 2002 Distribution $6,616,358 Source: Kansas Insurance Department The Amounts Distributed To Local Associations Increased by 22% Between 2001 and 2002 Graph I-1 shows the amounts distributed in each of the past 5 fiscal years. As the graph shows, those distributions were fairly stable from 1999 to 2001, but jumped to $6.3 million in Insurance Department officials we talked with attributed this change to an increase in policy premium rates charged by insurance companies. They told us they expected a similar increase for $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 Graph I-1 Firefighters Relief Fund Distributions (in millions) $4.8 $5.2 $5.2 $4.9 $6.3 $7.7 $ Estimated Source: Kansas Insurance Department 4 PERFORMANCE AUDIT REPORT

13 Question 2: How Are Local Firefighters Relief Associations Spending the Firefighters Relief Fund Moneys They Receive, and Are Those Uses Allowed by State Law? In 2001, local firefighters relief associations reported spending about 96% of their relief funds on insurance and annuity premiums and on other financial benefits for firefighters who are injured or killed on the job. These types of expenditures are allowed by law. Our review of reported expenditures for relief and other payments showed that some associations hadn t submitted sufficient documentation to tell what they had paid for, some had spent money on things that weren t allowed by law or Department regulations, and some had spent more than the amount approved for staff salaries or computer purchases, or hadn t obtained the necessary prior approval for such payments. The Insurance Department has established good procedures for helping to ensure that associations expenditures conform to the law, and Department staff had caught some but not all of the problems we identified during our review. We also noted that the Department needed to improve the guidance it provides local associations. These and other findings are summarized below. Both State Law and Insurance Department Regulations Govern How Firefighters Relief Fund Moneys Can Be Spent Moneys collected under the Firefighters Relief Fund Act of 1895 initially were to be used as prizes for efficient, well-drilled, and skilled fire companies belonging to the association and competing at an annual State tournament of the association. Since then, the Act has been amended many times. Current State law allows moneys distributed from the Firefighters Relief Fund to be spent for any of the following purposes: financial relief for firefighters who are injured or physically disabled on the job. This can include medical expenses, prescriptions, and lost wages death benefits and funeral expenses for firefighters who are killed on the job pensions for retired members after serving at least 20 years with the department annuities for volunteer firefighters who have served at least 20 years, and who were available for and participated in fighting at least 75% of the fires for that fire department insurance coverage that would provide for any of the above purposes In addition, the Insurance Commissioner has adopted regulations allowing local associations to use Firefighters Relief Fund moneys for reasonable administrative expenses including stamps, PERFORMANCE AUDIT REPORT 5

14 stationery, safe deposit box rents, independent audits of their accounts, the cost of fidelity bonds required by statute, and other similar expenses. Other types of administrative expenses also may be allowed at the discretion of the Commissioner. State Law and Insurance Department Procedures Provide a Good System for Helping To Ensure That Firefighters Association Expenditures Conform to the Law State law contains several requirements that help guard against misuse of Firefighters Relief Fund moneys. Specifically, the law: requires each association to submit an annual financial report to the Commissioner authorizes the Commissioner to try to recover any relief moneys that an association has spent for unauthorized purposes, and to withhold moneys from that association until notified by the county or district attorney that the situation has been corrected requires the treasurers of the relief associations to be bonded requires moneys received from the Firefighters Relief Fund to be kept in separate accounts and used only for the purposes set out in law requires all expenditures of $1,500 or more to be approved by an attorney designated by the local governing body as complying with the requirements of the Firefighters Relief Act For its part, the Insurance Department does the following to help guard against misuse of these moneys: has developed and distributed handbooks to all local firefighter associations explaining the requirements relating to the Fund conducts periodic training for those who handle moneys for these associations requires associations annual financial reports to contain detailed lists of what the money was spent for, copies of bank statements to verify cash balances and investments, and lists of the individual firefighters covered by insurance policies and the amounts of premiums paid for each firefighter has assigned an employee to review the annual financial reports and supporting documentation, and to follow up on any discrepancies noted during that review requires associations to obtain prior approval from the Kansas State Firefighters Association before using Firefighter Relief Fund moneys to buy computers or pay salaries to treasurers of the relief associations withholds future funding from associations that don t submit their annual reports or don t take corrective action Expenditure Reports Show That Local Associations Spent $7.6 Million in 2001, Mostly on Insurance and Annuity Premiums and Other Financial Benefits For Firefighters Local firefighters relief associations are required to submit their financial report forms for each calendar year by April 1 st of the following year. At the time we conducted our audit work, the latest reports filed were for calendar year 2001 expenditures. Those reports were filed in April In all, local firefighters relief associations reported spending $7.6 million in calendar year They were able to spend more than they received from the Fund that year because of moneys carried 6 PERFORMANCE AUDIT REPORT

15 over from previous years, interest earnings, and the like. The reader should be aware that these expenditures are somewhat understated 25 associations still hadn t filed their 2001 financial reports as of February 28, However, the amounts involved are fairly small; nearly all these associations are eligible to receive less than $5,000 per year from the Fund. As Graph II-1 shows, about 96% of the reported expenses or $7.3 million was for insurance / annuity premiums, annuity payments, pensions, relief payments to injured firefighters or their surviving dependents, and funeral expenses. Graph II-1 Firefighters Relief Fund Association Expenditures (Total Expenditures = $7,614,200) Life Insurance Premiums $5.4 million 71% Financial Relief to Injured Firefighters; Surviving Dependents $918,904 12% Annuity Premiums $731,617 10% Other $302,925 4% Pensions, Annuities, bonds, etc. $244,969 3% Source: Kansas Insurance Department To identify the types of expenditures being recorded under the Other category, we looked at the information reported by all associations that said they Table II-1 Firefighters Relief Fund: Associations Reporting More Than $500 in Other Expenditures in 2001 Description Amount Percent Treasurer Compensation $75,809 26% Insurance or Annuity Premiums Incorrectly Listed As Other $39,965 14% Loans to Governing Bodies under KSA (f) $31,391 11% Refunds to Firefighters for Their Share of Payments on Cancelled Annuities $31,826 11% Office Equipment and Supplies $25,118 9% Accounting and Legal Fees $22,190 8% Reimbursements to Other Local Entities for Association Costs $15,116 5% Miscellaneous and Can t Tell $14,221 5% Bank Charges and Early Withdrawal Penalties $11,737 4% Loss on Annuity Investment $11,116 4% Refunds to Firefighters for Cancelled Insurance Policies $10,796 4% Source: Kansas Insurance Department spent more than $500 in that category in Those 54 associations accounted for more than 95% of the approximately $303,000 firefighters relief associations reported spending in the Other category that year. Table II-1 summarizes the types of expenditures we saw in this category. PERFORMANCE AUDIT REPORT 7

16 Our Review of Expenditures Showed That Associations Need To Improve Documentation, And That the Department Needs To Provide Better Follow-up Most expenditures shown in associations financial reports such as annuity payments and insurance premiums clearly are allowed by law. Therefore, because of time constraints for this 100-hour audit we focused our testwork on 2 expenditure categories that appeared to have a greater risk of inappropriate expenditures relief payments to firefighters, and other. Our reviews involved a sample of 54 firefighters relief associations. In all, 11 of those 54 associations had reported making relief payments to firefighters; all had made payments they categorized as other. Our findings are summarized below:! 6 of the 54 associations we reviewed didn t submit sufficient documentation that would allow us or Insurance Department staff to know what was paid for in the amounts they classified as relief payments or other. These associations and their reported expenditures are shown in Table II-2. Table II-2: Associations That Didn t Provide Sufficient Documentation To Tell What Their Relief and Other Expenditures Were For Associations Amount Type of Expenditure Glasco $10,716 Other Greely County $3,192 Other Sherman Twp $500 Other Subtotal $14,408 Johnson County $5,397 Relief Payment Hutchinson $3,480 Relief Payment Burlingame $1,850 Relief Payment Subtotal $10,727 TOTAL $25,135 Source: Kansas Insurance Department! 5 of the 54 associations we reviewed spent money on things that weren t allowed by law or Insurance Department regulations. Those included such things as flowers and uniforms and conference registrations. The items and their amounts, which totaled nearly $24,000, are shown at the top of Table II-3.! 17 of the 54 associations we reviewed spent more than the amount approved for staff salaries or computer purchases, or didn t get the required approval at all. Department officials told us that using Fund moneys to pay for salaries for association treasurers or computer purchases is allowed if the associations first get approval from the Kansas State Firefighters Association. Once the Association approves the expenditure, the request is to be 8 PERFORMANCE AUDIT REPORT

17 Table II-3 Summary of Problems Related to Other Expenditures Association Expend. Description Concordia $19,891 Listed as loan to governing body to buy equipment, as allowed by KSA (f), but check made out directly to equipment supplier. The Department caught this. A loan warrant is supposed to be issued to correct this situation. Stockton $2,380 Equipment paid for out of wrong account, The Department caught this and the Association stated it will correct Greensburg $1,184 Equipment paid for out of wrong account. The Department caught this and the Association stated it will correct. Kansas City $151 Flowers and uniforms paid for out of wrong account. The Department caught this and the Association corrected it. Edwardsville $110 Firefighter conference registration for two people. Department hadn t caught. Total $23,716 Computer Purchases Made Beyond Amount Approved / Without Prior Approval Association Expenditure KSFFA Approval Dept. Approval Amount Spent Beyond Amount Approved by KSFFA Chapman $2,086 $2,030 None $55 Eudora $1,821 $1800 None $21 Augusta $1,682 $2,000 None $0 Soldier Twp $1,564 $850 None $714 Blue Twp $1,270 $1,046 None $224 Overland Park $1,260 $2,500 None $0 Wakarusa $1,190 Not Requested None $1,190 Geary County $783 $1,669 None $0 Total $11,656 $2,204 Treasurer Compensation Paid Beyond Amount Approved / Without Prior Approval Association Expenditure KSFFA Approval Dept. Approval Amount Spent Beyond Amount Approved by KSFFA Wichita $38,170 $41,376 None $0 Topeka $12,580 $4,800 None $7,780 Kansas City $10,800 $10,800 None $0 Arkansas City $5,360 Not Requested None $8,635 Hutchinson $3,324 $3,324 None $0 Stanton $2,280 $900 None $1,380 Salina $1,800 Up to $4,800 None $0 Atchison $1,000 $2,520 None $0 Waterville $360 $396 None $0 Wakarusa Twp $134 Not Requested None $134 Total $75,808 $17,929 Source: Kansas Insurance Department PERFORMANCE AUDIT REPORT 9

18 forwarded to the Insurance Commissioner for final approval. As summarized in Table II-3, we noted several problems with these expenditures: there was no documentation that any were ever formally approved by the Insurance Department 3 associations didn t request the required approval from the Kansas State Firefighters Association 2 associations requested but apparently never received approval from the State Association 6 associations spent more than the amount approved. The biggest dollars in this area were for treasurers salaries The Department employee assigned to review associations financial reports also had identified some but not all of these same areas as problems that needed to be fixed. During our review, we noted that this employee frequently sent letters asking for additional information when sufficient documentation wasn t provided, and sometimes withheld checks to associations until they provided the requested information. However, in 6 of the 11 cases where the required documentation wasn t provided for relief payments, we found no evidence that associations had been asked to provide the required data. Also, the employee hadn t raised questions about the associations excess or unapproved payments for treasurers salaries or computers. The Department withholds funds from associations that don t provide all the required data. When associations didn t file the required financial reports, or when those reports lacked appropriate documentation or showed inappropriate expenditures, the Department generally withheld funds. In many cases, the associations later filed or made corrections to their annual financial reports before they received their share of the annual distribution. As of February 28, 2003, more than 30 associations either hadn t filed or needed to correct something on their 2002 financial reports. The Department was holding slightly more than $108,000 owed to those associations. The Department s legal attempts to require firefighters relief associations to comply with the law haven t been effective. In one case, a treasurer who admitted taking $10,000 of the relief money distributed to his association repaid part of the money immediately when caught, and promised to repay the rest. He s never done so. As described in the accompanying profile, the Department was unsuccessful in getting the county attorney to prosecute this case. 10 PERFORMANCE AUDIT REPORT

19 Over the Past Few Years, Department Officials Have Discovered Fraudulent Activity Relating to Two Local Firefighters Relief Associations In 2002, the White Cloud association filed its Declaration for Participation and received the distributions of funds. Insurance Department staff noticed a discrepancy and contacted the association for more information. That s when they discovered White Cloud hadn t had a fire department for at least 10 years, but had falsely reported having everything in place and received funds inappropriately during that time. The Department has required the association to return all the funds it received during this period, or over $33,000. In 2001, Department staff identified a $10,000 discrepancy on the annual financial statement for the Ozawkie association, and sent a letter requesting an explanation. The treasurer admitted to the county attorney that he had taken the money for his own use in He immediately repaid $6,700 and signed a statement saying he would repay the remaining balance by April So far, he hasn t repaid any of the remaining $2,300. State law requires the county attorney to prosecute the matter. The association has sent at least 2 letters to the county attorney regarding this repayment, but received no response. The matter has recently been brought to the attention of the new county attorney for prosecution. In another case, the relief association in Bird City hasn t filed the required financial reports since Although the Department has written at least 8 letters since May 2000 to that association trying to get the required documents, it has received no reply. The Department s legal staff sent a letter to the Cheyenne County Attorney in August 2002 asking for help in ensuring that the required financial reports were filed. In the 8 months since that letter was sent, there s no evidence of further follow-up and the reports were still delinquent at the time our audit work concluded. The Department s Guidance in Some Areas Needs To Be Improved The Department provides a handbook containing applicable laws, regulations, and other guidance to association treasurers regarding the Fund. Based on our review of records at the Insurance Department, we noted several areas where guidance contained in that handbook needs to be improved, as follows: Updating the handbook on using Fund moneys to pay for treasurer salaries and computers. Department officials told us the Insurance Commissioner has allowed Relief Fund moneys to be used for treasurers salaries and computer purchases since about 1997, provided the associations get certain approvals before making those expenditures. Portions of the handbook listing permissible disbursements of the firefighters relief funds don t cite salaries at all, and make no reference to the approval process Department officials described to us. PERFORMANCE AUDIT REPORT 11

20 Providing examples of acceptable documentation for each area where a detailed list is called for. Local associations are required to submit detailed lists or other documentation supporting certain types of expenditures in their annual financial reports. The problems we noted with associations not submitting sufficient documentation to tell how their funds really were being spent might be minimized if the handbook provided examples of the types of information or documentation the Department considers acceptable. Making sure the handbook contains the most up-to-date information on laws and regulations. An internal audit of procedures related to the Firefighters Relief Fund conducted by Department staff showed that amendments to the Firefighters Relief Fund Act (K.S.A ) hadn t been updated in the Department s handbook. Conclusion Overall, the Department has a good oversight process in place to review the expenditures of firefighters relief associations. A number of the issues we raised after reviewing the expenditure reports of the associations had already been caught by the employee assigned to review those forms, and in most cases follow-up letters had been sent and funds were withheld if corrections weren t made. There were three areas where it appears the Department could improve its processes. One was to update its handbook to include the most recent changes to laws and regulations and to clarify the requirements for spending money on salaries and computers. A second area is to improve documentation of approvals for salary and computer expenditures. Finally, it appears that the Department needs to strengthen its follow-up procedures in cases where relief associations don t respond to normal correspondence or the withholding of funds. Recommendations 1. To ensure that all firefighters relief associations have the most recent information about statutes, regulations and requirements related to paying salaries or purchasing computers, the Department should update the handbook it provides to firefighters relief associations. 2. To ensure that all firefighters relief associations are complying with requirements related to expenditures for salaries or computer equipment, the Department should ensure that it has copies of any required approvals in the files of associations that make such expenditures. 12 PERFORMANCE AUDIT REPORT

21 3. To ensure that firefighter relief associations aren t allowed to operate for years without filing required financial reports, the Department should review the methods its legal staff use to bring associations into compliance, and adjust those procedures as needed to ensure that violations of the law don t slip through the cracks. PERFORMANCE AUDIT REPORT 13

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23 Appendix A Scope Statement This appendix contains the scope statement approved by the Legislative Post Audit Committee for this audit on February 24, The audit was requested by Senator Kerr. 14 PERFORMANCE AUDIT REPORT

24 SCOPE STATEMENT Firefighters Relief Fund: Reviewing the Use of Fire Insurance Premium Taxes Distributed to Local Firefighters Relief Associations State law (K.S.A et seq.) assesses a tax on fire and lightening insurance premiums collected for coverage in Kansas. The tax is collected by the Insurance Department, and deposited in the State Treasury. In fiscal year 2000, the amount collected was about $5 million. The moneys collected are distributed as follows: 3% to the State Firefighters Association for fire-related education and study 5% to the State Firefighters Association for death benefits, subject to a statutory maximum $1,000 to each local firefighters relief association (there are about 550 of these) an amount for administrative costs of the Insurance Department as appropriated by the Legislature the remainder distributed to local firefighters relief associations, generally in the same proportion as specified past distributions Legislators have expressed concerns about how local firefighters relief associations are spending the moneys they receive from the State s collection of insurance premium taxes, and whether those uses are consistent with the uses authorized by State law (K.S.A ). In general, allowed uses are financial relief for injured or disabled firefighters and payment of death benefits, funeral expenses, pensions, and insurance premiums. A performance audit in this area would address the following questions: 1. How much money is currently being distributed to local firefighters relief associations, and how fast has the amount distributed grown? To answer this question, we would review records of the Insurance Department to identify amounts distributed during the five most recent fiscal years. We would interview Department officials and review applicable records to identify factors contributing to that growth. 2. How are local firefighters relief associations spending moneys received from the State s collection of insurance premium taxes, and are those uses allowed by State law? To answer this question, we would review the statutes to identify the uses allowed by State law. We d interview Insurance Department officials to identify any guidance they provide to local firefighters associations in spending those moneys, and any oversight they perform of those expenditures. For a small sample of local firefighters associations, we d review supporting documents for a sample of recent expenditures to identify the purposes of those expenditures and determine if they were consistent with the requirements of law. We d conduct other audit work as necessary. Estimated completion time: 100 hours PERFORMANCE AUDIT REPORT 15

25 Appendix B Firefighters Relief Associations This appendix contains a list of the local firefighters associations, the amount of distributions they received in 2001, and the total amount of expenditures they had for In some cases, the associations have more expenditures than distribution amounts received, because they have other sources of income, like interest earnings. 16 PERFORMANCE AUDIT REPORT

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28 Appendix C Agency Response On April 22, 2003 we provided copies of the draft audit report to the Insurance Department. Their response is included in this appendix. PERFORMANCE AUDIT REPORT 19

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