THE MISSISSIPPI LEGISLATURE

Introduction

In response to legislative concerns regarding the cash management practices of the central office of the Board of Trustees of Institutions of Higher Learning (IHL), PEER sought to determine whether the accounting practices and external controls over the IHL central office ensure an adequate level of accountability for the public funds disbursed from that office.

Central office funds included in the scope of this review consist of $17,022,202 in funds disbursed under the direct control of the IHL staff, including $7,872,198 in general and Education Enhancement funds received for operations of the executive office Systems Administration, the University Research Center and Student Financial Aid, and $9,150,004 in Education Enhancement funds received into and spent from the central office in support of the institutions.

Overview

IHL's central office accounting and cash management practices did not ensure an adequate level of accountability for public funds received and disbursed during FY 1995, but the IHL central office has improved some procedures during 1996. In FY 1995 IHL was not fully accountable in the following areas:

• Drawing funds from the state Treasury in compliance with state law-The central office drew at least $717,016 from the Treasury which it did not spend during the year of appropriation and did not return at the end of the year, in violation of Section 64 of the MISSISSIPPI CONSTITUTION. Retaining the unspent state funds reduced accountability because the funds were maintained in a private bank account, available to be spent on special projects without oversight by the Legislature. In drawing the funds, the central office used the flexibility provided by MISS. CODE ANN. § 7-9-41, which allows IHL to draw the funds from the Treasury on a lump sum basis rather than have its expenditures pre-audited by DFA.
• Allocation and distribution of funds to the institutions-The central office's practice of contracting for services on a system-wide basis and billing universities for their share of the expenses allows IHL to manage and control system-wide expenditures. However, the central office sometimes bills the universities for expenditures which are the responsibility of the board, which results in an understatement of system administration costs and an overstatement of university expenditures. In FY 1995, this practice resulted in understating an estimated $198,453, or 7.5%, of IHL's system administration costs.
• Maintenance of financial records to retain identity of state funds and facilitate comparison of appropriations and expenditures-The central office has maintained its accounting records in a way that commingled state Treasury and special source funds, which hindered tracking of appropriations from receipt through expenditure. In addition, historical revenue and expenditure reports could not be obtained in a cash-basis format that could readily be compared to appropriations. These practices hindered the Legislature's ability to determine that Treasury funds were being spent as intended under state law.
• Reporting practices to disclose total level of funding and expenditures-IHL's central office did not report complete special fund revenue or expenditure information to the Legislature in FY 1995. In violation of MISS. CODE ANN. Section 27-103-123, IHL's central office excluded $20,219,108 in special funds receipts from its report to the Legislature on total FY 1995 central office revenue. IHL violated the same disclosure statute by excluding $687,864 in special source fund expenditures from its report of total central office spending. As a result, IHL did not make the Legislature aware of all revenues available to the central office or of the scope of system-wide administrative functions which it has assumed. The Legislature needs this information in order to be fully informed when making funding decisions.

In the spring of 1996, the central office took steps to remedy past problems, as summarized below:

• The board returned $655,139 of the unspent FY 1995 funds to the Treasury on May 15, 1996, and central office staff expressed intentions of returning the remaining $61,877 to the Treasury before the end of FY 1996. IHL also returned $1,387,591 of Education Enhancement appropriations which IHL had drawn from the Treasury to build a tort liability reserve for the institutions but which exceeded recent estimates of actuarial requirements.
• DFA and the central office have begun to develop procedures to improve IHL's compliance with state law, including:
  • strengthening an IHL certification statement which accompanies central office draws from the Treasury and attests to their legality; and,
  • requiring the central office to provide documentation to substantiate that Treasury draws will be used to reimburse current year spending.
• Central office staff have created new accounts which, if used properly, will allow for the separate accounting by type of sources and uses of state Treasury appropriations in order to maintain identity of state funds.

Conclusion

In the past, the IHL central office has engaged in cash management, accounting, and reporting practices which reduced accountability to the Legislature for the expenditure of state funds. During 1996, IHL has taken corrective action and has returned a total of $2,042,730 in state funds to the Treasury.

The central office's revised procedures, along with the recommendations summarized below and detailed in the report, should improve the oversight and accountability for state funds handled by the central office.

Recommendations

Institutions of Higher Learning

1. The central office of IHL should:

• - review its procedures for billing universities, revise its billing methods to bill only for those costs which are the responsibility of the universities, adjust its budget to reflect the total costs which are the responsibility of the board, and present budget requests to the Legislature which represent the full costs of board activities;
• - maintain historical records of receipts and expenditures on a cash basis, including disbursements occurring in the lapse period, in order to facilitate reporting of state appropriations and related expenditures by type of appropriation for past years. (This recommendation could be implemented in conjunction with the central office's present accrual basis of accounting.);
• - report all expenditures and special fund revenues to the Legislature in the budget request form, including the transactions in the trust funds and central service accounts created to bill universities for central service expenditures;
• - return routinely all funds to the State Treasury which are received but not spent during a given fiscal year, as provided in Section 64 of the Mississippi Constitution;
• - along with guidance from the Department of Audit, direct the establishment and maintenance of accounting records for the cash balances of the Master Lease Purchase Program for each of the universities involved in the program; and,
• - in order to improve the audit trail of accounting transactions, seek to improve documentation of its journal entries to explain fully the purpose of the transaction.

2. The Board of Trustees of IHL should provide sufficient oversight to ensure that central office cash management and reporting practices are in compliance with the law, that the central office has spent funds in the appropriate fiscal year, and that all funds received from the Treasury are returned at the end of each fiscal year if not spent.

Department of Finance and Administration

3. DFA should audit each month a scientific sample of the central office's claimed expenditures using the same pre-audit verification procedures as it does for other state agencies as required under CODE Section 7-7-33.

4. As a part of the revised funds-withdrawal procedures which DFA has required of the central office during 1996 and in the event of changes in personnel at either agency, DFA should provide in writing to IHL the specific types of accounting information required. DFA should also complete internal written policies for the routine process it will use in auditing a sample of the central office's expenditures and reviewing the quarterly central office statements which it has required IHL to provide.

5. In addition to the revised funds-withdrawal certification statements which DFA has required of the IHL central office, DFA should request a revision of the certification statements submitted for university draw downs, including a certification that the funds are being drawn in accordance with Section 64 of the CONSTITUTION and will be used to pay for valid claims of goods and services received by the university during the fiscal year of the appropriation.

Legislature

6. To hold the central office to the same standard as other state agencies, the Legislature should consider amending MISS. CODE ANN. § 7-9-41 to:

• - require that DFA pre-audit and verify all of the central office's expenditures as required for other agencies under CODE Section 7-7-33; and,
• - amend the current language which allows a change in procedures for IHL's withdrawals from the Treasury only upon the concurrence of the State Fiscal Officer and the institutions of higher learning. The language could be amended to state that the agreed-upon system of funds withdrawal "shall not be changed except on the approval of the State Fiscal Officer."

7. The Legislature should consider revising the language in the annual appropriations bill passed for the support of the institutions and the executive office of IHL in order to provide more guidance to DFA in its distribution of lump-sum Education Enhancement Fund appropriations made for the support of the institutions. The revised language could delineate which funds are intended to be spent from the central office in support of the institutions and which are intended to be spent directly by individual institutions.

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