Auditor General Wagner's Special Investigation: Faulty Billing, Improper Gifts, and Excessive Compensation at Pa. Twp. Supervisors Association

State was overbilled millions, former director was paid over $400,000 annually

HARRISBURG, Pa., Dec. 7, 2010 /PRNewswire-USNewswire/ -- Auditor General Jack Wagner said today that the Pennsylvania State Association of Township Supervisors provided employees of the Department of Community and Economic Development – who were responsible for evaluating and ultimately awarding the association a state training contract – with gifts including luncheons and free lodging and conference expenses at a lavish resort.  PSATS subsequently overbilled the state millions of dollars while paying PSATS' former executive director an excessive compensation package averaging $407,608 per year between 2004 and 2008.

Wagner said that a special investigation of DCED's contract with PSATS found that the former executive director's compensation package was nearly triple the compensation of the next highest paid employee of the association, and it significantly exceeded the salaries of executive directors of township associations in other states and that of comparable non-profit agencies in Pennsylvania.  The former executive director was paid total compensation of $2,038,040, between 2004 and 2008, and his compensation package peaked at $561,274 in 2008.

"The compensation package of the former executive director of the Pennsylvania State Association of Township Supervisors is excessive and unreasonable given the nature of the association's nonprofit status and establishment as a quasi-public organization largely funded by local and state tax dollars," Wagner said.  "It may also be a violation of state and federal laws governing nonprofit organizations.  I urge PSATS to fix this problem and for DCED to immediately take steps to implement all of the recommendations of the special investigation report."

Wagner's investigators found that the executive director's compensation package included an incentive or bonus payment equal to 1.9 percent of the gross revenues from all contract business, including but not limited to the contract with DCED.  Federal and state laws prohibit the use of the net earnings of a non-profit organization from being used to benefit members, officers, or directors of the organization.

Wagner provided copies of his report to the Pennsylvania Office of Attorney General, the State Ethics Commission, the Pennsylvania Treasury Department, the Pennsylvania Department of Revenue, and the Internal Revenue Service for whatever further action that they deem appropriate.  He also provided copies to the other state agencies, in addition to DCED, with previous or current contracts with PSATS, including the Department of Environmental Protection, the Department of Labor and Industry, and the Department of Transportation.

Wagner's report noted that 54.6 percent of PSATS' total revenue was derived from state grants and contracts, or $18.6 million of $34 million in total revenue between 2005 and 2008.

DCED's Center for Local Government Services is responsible for monitoring and coordinating municipal training to meet the needs of local governments by providing affordable training opportunities including a full range of disciplines such as municipal finance, administration, tax collection, land use planning, police, fire, and public works.  Rather than meeting those responsibilities using state employees, DCED has outsourced those services to an outside vendor since 1996.

Wagner's investigators determined that DCED employees accepted meals, hotel lodging, and conference expenses from PSATS totaling $2,716, including eleven meals during the time when the competitive proposals were being evaluated.  This was in violation of state gift and travel rules and possibly in violation of the state Public Official and Employee Ethics Act, Wagner said.

"Accepting meals and stays at luxury resorts at the expense of a vendor compromises objectivity and independence, and prevents government employees from discharging their duties without bias towards a particular vendor," Wagner said.  "Government employees must maintain objectivity and independence in their duties, both in appearance and in reality."

PSATS has held the training services contract since 1996, and it received its latest contract award in 2005.  At that time, the commonwealth allocated $3.9 million for a five-and-a-half-year period covering January 2006 to June 2011.  However, within the first 14 months of the contract, DCED on three occasions expanded the scope of the work to be provided and increased total contract amount to $5.6 million, because of other commonwealth agencies and other offices within DCED "piggy-backing" on the contract.  Subsequent amendments to the contract have increased its total cost to $12 million.

In addition, Wagner's investigators found numerous billing discrepancies and flaws.  They included:

• 17 Percent Surcharges on Pass-Through Payments to Third Parties – PSATS added a 17 percent surcharge to all billings, consisting of a 9 percent surcharge to cover "overhead" and an 8 percent surcharge to cover "administrative costs".  Payment under the contract is limited to reimbursement of the costs of providing the training services, and surcharges for overhead and administrative costs are commonly used to calculate such costs.  However, investigators found that PSATS could not document what costs were reflected in those percentages.  In addition, investigators found that the surcharges were applied not only to services provided by PSATS' own employees, but also to pass-through billings from third-party vendors and subcontractors who actually conducted the training programs.  PSATS submitted over 100 invoices to the commonwealth every year for training programs that included services actually provided by third-party vendors and subcontractors; the average surcharge billed to and paid by the commonwealth for these pass-through billings was $5,690 per invoice.  Consequently, for every 100 invoices paid, PSATS would receive excess compensation of approximately $569,000 solely from the 17 percent surcharge on the cost of training programs and other goods and services provided by third parties.
• No Itemized Costs For Training Classes – PSATS billed DCED for the aggregate costs of all training classes provided in a particular time period, and DCED failed to require PSATS to itemize the costs for each individual training class, thereby making it impossible to determine whether PSATS gave proper credit for all registration fees collected from attendees of the training classes.  Wagner's investigators were able to determine that, for two training programs analyzed, the commonwealth did not receive proper credit for $44,594 in registration fees collected.
• No Guidelines For Eligible Costs - DCED has not established guidelines of eligible costs to be reimbursed under the contract.  Consequently, DCED reimbursed PSATS for excessive and unreasonable costs.  The investigation found that the more egregious of these expenses cost the commonwealth approximately $20,000 for things such as food provided at training seminars, meals from local restaurants, and training at historic inns and resorts.

"The findings and recommendations presented in the special investigation report are intended to not only provide guidance to DCED when drafting and entering into future contracts for training services, but also to assist DCED in its monitoring of the current contract with PSATS and to serve as a basis for DCED to withhold future payments to PSATS until it provides the information necessary to prove that it has not overbilled the commonwealth," Wagner said.

Wagner made 19 recommendations to fix the deficiencies identified by the investigation to improve the monitoring of the training contract, including that DCED should:

• Draft future Request for Proposals and contracts with nonprofit organizations to require prospective vendors to document the amount of compensation paid to top management employees and certify that the amount is reasonable and in compliance with state and federal law, as well as to document cost factors for administration and overhead to preclude the vendor from charging costs in excess of the actual costs incurred in providing the services described in the contract;
• Follow the commonwealth's travel and gift rules, require DCED employees to pay for their own expenses and submit the expenses to DCED for reimbursement, and ensure that employees comply with the Governor's Code of Conduct, the Commonwealth Travel Procedures Manual, and the Ethics Act;
• Analyze PSATS' payroll records to determine the actual costs that PSATS incurred and reconcile actual costs to invoices submitted by PSATS, develop guidelines for allowable costs, and take action to recover any overcharges, including recouping the 17 percent surcharge that PSATS applied to services provided by third party vendors;
• Require PSATS to reformat its invoices to show the costs and the registration fees collected for each individual training class, as the contract requires; and
• Review invoices in detail and obtain an explanation for any questionable or poorly documented expenses prior to approving the invoices for payment.

Based on DCED's response to the investigation, which is included in the report, Wagner said, "It is encouraging that DCED has already taken some limited steps to tighten up the terms of the contract to improve PSATS' accountability and has expressed an intention to consider some of our recommendations in the drafting of future contracts.  We will follow up at the appropriate time to determine whether all of our recommendations have been implemented."

A full copy of the investigation report is available to the public at www.auditorgen.state.pa.us.  

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly.  He is the Commonwealth's elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations.  The Department of the Auditor General conducts more than 5,000 audits per year.  To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department's Web site at www.auditorgen.state.pa.us.

SOURCE Pennsylvania Department of the Auditor General