Report 2012-121.1 Summary - February 2013

Department of Parks and Recreation:

Weak Procedures Have Led to Inconsistent Budgetary Reporting and Difficulties in Measuring the Impact of Efforts to Keep Parks Open

HIGHLIGHTS

Our audit on the Department of Parks and Recreation's (department) budgeting processes highlighted the following:

RESULTS IN BRIEF

The Department of Parks and Recreation (department) is responsible for preserving the State's biological diversity; protecting natural, cultural, and historical resources; and creating opportunities for high-quality outdoor recreation for current and future generations to enjoy. With a budget of nearly $574 million for fiscal year 2012-13, the department manages more than 270 park properties or units, such as state beaches, state historic parks, and off-highway vehicle parks. The department's park system is organized into 25 districts, five of which include off-highway vehicle parks. Many of the districts are further organized into 66 smaller groupings called sectors, and each sector comprises several park properties. The department receives funding from several sources, including the State's General Fund, various bond funds, and several special funds such as the State Parks and Recreation Fund (parks fund) and the Off-Highway Vehicle Trust Fund (off-highway vehicle fund).

In fiscal year 2011-12 the parks fund received a majority of its revenue from state beach and park service fees, which include revenue collected at state parks for camping, day use,1 pay showers, reservations, and seasonal passes. The parks fund also received revenue as transfers from the Highway Users Tax Account and a portion of the fuel taxes deposited in the Motor Vehicle Fuel Account. Finally, the parks fund received miscellaneous revenues from concessions, merchandise sales, and lease or rent payments, among other revenues received at state parks. The parks fund can be used for a broad range of activities to support park operations, including state park planning, acquisition, and development projects. Other purposes for which the parks fund can be used include resource and property management and protection, and training department employees in the Ranger/Lifeguard classification.

For fiscal year 2011-12 the off-highway vehicle fund received revenues from four sources, including transfers from the Motor Vehicle Fuel Account; the off-highway vehicle fees, which are service fees collected by the Department of Motor Vehicles for the issuance and renewal of identification plates or devices for off-highway motor vehicles and delinquency penalties related to those fees; state beach and park service fees; and miscellaneous revenue. The off-highway vehicle fund may be used for planning, acquiring, developing, constructing, maintaining, administering, and conserving trails and areas used by off-highway vehicles, including dirt bikes, all-terrain vehicles, recreational utility vehicles, jeeps, and snowmobiles.

For years the department has continually reported different fund balance amounts to the Department of Finance (Finance) than it reported to the State Controller's Office (State Controller) for both the parks fund and the off-highway vehicle fund. In most cases, the fund balance amounts that the department's budget office reported to Finance for use in preparing the governor's budget were less than the amounts its accounting office reported to the State Controller for use in the Budgetary/Legal Basis Annual Report (budgetary report). As the administering organization for these funds, the department is instructed by Finance to use its year-end financial statements as the basis for preparing budget documents for the following year's governor's budget. Additionally, according to the State Administrative Manual, it is important that fund balance, revenue, expenditure, and other accounting data included in the prior-year presentation of the governor's budget agree in amount and classification with similar data published in the State Controller's budgetary report. However, we found that the fund balances reported in the governor's budget and the State Controller's budgetary report over the past two decades were almost always reported differently, a discrepancy that continued until the fall of 2012.

Correspondence we reviewed in the department's accounting and budget files show that Finance informed the department that differences existed between the amounts reported in the governor's budget and those provided in the State Controller's budgetary report as early as April 1999, yet neither current staff nor documentation we reviewed in the accounting and budget files at the department supplied an explanation regarding what originally caused the differences or why the issue was not resolved until the fall of 2012. The department's former acting chief deputy director told us that when he started at the department in 2003 as the deputy director of administration he was informed by the budget officer at the time that the difference in reporting for the parks fund was the result of an error made several years earlier that understated the amount reported to Finance.

Over the years, various individuals at the department became aware of the differences in the amounts being reported. According to the current accounting administrator, approximately one year after she became aware of reporting differences in 2002, she was directed by the accounting administrator at the time to begin preparing fund condition statements—which show revenues, expenditures, prior-year adjustments, transfers, and fund balances—and providing them to the department's budget office. However, she stated that the department's budget office continued to report its own amounts and that over the next six years three different budget officers, including the current one, came to her with concerns about the differences in reporting. According to the department's current budget officer, she noticed the reporting differences when she started working at the department in February 2011. She stated that she discussed the issue with the former deputy director of administration and the former acting chief deputy director, and both told her not to change anything in the way the budget office was reporting, as they were concerned that, if the department reported the fund balances accurately, as shown in the State Controller's records, the department's General Fund appropriation could be reduced. Because amounts in the governor's budget were inconsistent with amounts reported in the State Controller's budgetary report, the difference created confusion among the public and decision makers regarding the actual balance in each fund. Additionally, such inconsistencies may have resulted in the Legislature and the governor using inaccurate financial information when making budgetary decisions concerning the department.

An adjustment by Finance to the off-highway vehicle fund in 2011 contributed to the difference between the fund balance reported in the governor's budget and the one reported in the State Controller's budgetary report. During the preparation of the January 2012 Governor's Budget, the department correctly used its year-end financial statements for fiscal year 2010-11 to report transfer amounts to the off-highway vehicle fund. However, we found that Finance significantly reduced these transfer amounts from $117.5 million to $62.6 million, based on proposed legislation. The reduction, totaling nearly $55 million, contributed to the department's ending fund balance for the off-highway vehicle fund in the governor's budget being understated by more than $33.5 million2 when compared to the ending fund balance in the State Controller's budgetary report. According to a principal program budget analyst (principal analyst), Finance made the adjustment to avoid misleading the Legislature and other stakeholders that would need to consult the fund condition statement in the January 2012 Governor's Budget. Specifically, he stated that Finance reduced the amounts transferred to the off-highway vehicle fund because a state law that took effect in July 2010 resulted in an unintended increase in deposits to the off-highway vehicle fund. Finance proposed legislation that would transfer the additional funds deposited into the off-highway vehicle fund to the Transportation Tax Fund. However, the legislation was not approved at the time Finance reduced the transfers and did not become law until June 2012—well after fiscal year 2010-11 ended.3

The principal analyst agreed that the way the transfer was presented could be perceived as misleading if viewed in isolation. He stated that Finance handles pending bills that may have an effect on fund condition statements on a case-by-case basis and that there are no specific guidelines for how it should treat funds that could potentially be influenced by pending legislation. He also stated that this is the only instance that he is aware of in which Finance made a major adjustment to prior-year actual amounts that in turn created a large discrepancy between the department's accounting records and what was reported in the fund condition statement. According to the chief of Finance's fiscal systems and consulting unit, Finance will consider implementing a policy to ensure that, in the future, when a decision is made to reflect the effect of pending legislation in a prior-year fund condition statement, any related adjustments will be made explicit and obvious.

In considering the department's reaction to Finance's decision, we noted that the department lacked policies and procedures to handle such changes. According to the department's budget officer, she discussed this issue with the former deputy director of administration and they were comfortable with Finance adjusting the transfer amount, since it was supported by proposed legislation to move the unintended additional funds out of the off-highway vehicle fund. However, the budget officer acknowledged that she did not document the discussion. At a minimum we would have expected to see such a significant change escalated within the department to ensure that the department's highest levels of management were informed of the change and its effect on the fund balance. This adjustment and its presentation in the governor's budget contributed to a $33.5 million understatement of the fund balance in the off-highway vehicle fund. When coupled with the $20.4 million that the department's budget office underreported for the parks fund, the resulting difference led the public to believe that the department was hiding nearly $54 million.

In addition to the spending authority it receives from the parks fund and the off-highway vehicle fund, the department receives appropriations from the General Fund to operate state parks. The January 2011 proposed Governor's Budget included a reduction of $11 million in the department's fiscal year 2011-12 General Fund appropriation and indicated that the decrease would result in partially or fully closing some parks. In response to the proposed reduction in its funding, the department developed a methodology for selecting parks for closure, and in May 2011, announced that it would need to close up to 70 specific parks to achieve the budget reduction. According to the department's former acting chief deputy director, in late 2010 Finance verbally communicated to the department that it would be reducing the department's General Fund appropriation by $22 million, and it asked the department to propose a plan to achieve savings. He stated that he then verbally communicated to Finance the department's decision that it would close parks rather than reduce services. Further, he stated that to the best of his recollection this decision was made by the management team at that time, which included the department's director, himself, the deputy director of administration, and the deputy director of park operations. The team believed that reducing park operations further would not be the best option, because park services were already operating at minimum levels, and it felt that park closures provided a better long-term solution.

A new state law that became effective in March 2011 specifies the factors that the department must consider when selecting parks for closure to achieve a required budget reduction. The new law also requires the department to determine the amount of a budget reduction in future budget acts by using as its baseline the amount necessary to fully operate its 278 parks at the 2010 level. The former acting chief deputy director indicated that the list of 70 parks selected for closure, and the criteria used to select them, were identified before the law took effect. He also explained that a working team consisting of district superintendents and park operations management identified the factors used to select parks for closure. We noted that the methodology the department said that it used to select the 70 parks generally included most of the factors specified in the new law, and the former acting chief deputy director indicated that the department's criteria were used as the basis for the new legislation. However, because the department lacks written analyses of this process, it may not be able to justify the reasonableness of its park closure selections to the public.

Although we would have expected the department to have already determined this baseline amount, as well as the difference between that amount and the amount appropriated in the fiscal years 2011-12 and 2012-13 budget acts, the deputy director of administration4 stated that the department has not determined the amount needed to fully operate the 278 parks at the 2010 level. As a result, the department may have been premature in announcing that it would have to close up to 70 specific parks to achieve the General Fund reduction.

Although a new state law that took effect in September 2012 prevents the department from closing any parks through fiscal year 2013-14, it is possible that it will face funding challenges in the future. Therefore, we believe it is important for the department to determine the amount to fully operate its 278 parks at the 2010 level.

Finally, because of concerns with the department's outdated and incomplete cost estimates, we found it difficult to measure the impact of the department's operating, concession, and donation agreements, collectively known as partnership agreements. To determine the effect of a partnership agreement on a park, the district would need to know the cost of operating that park; however, according to the deputy director of administration, the department does not budget or track expenditures at the park level. The methodology that the department developed to estimate operating costs for its parks, including those that it identified for closure, uses the proportion of a district's costs that are attributed to each park in the district—proportions that were last determined in 2002—and applies these proportions to the actual district expenditures for fiscal year 2007-08 to divide up the costs among the parks. As a result, the department's estimated park operating costs were outdated.

Further, the estimated costs included only the direct costs of the parks, not indirect costs such as a park's share of statewide costs for accounting, payroll processing, and procurement. More recently the department asked the districts to develop new estimated operating costs for parks on the closure list. However, these estimates were difficult to compare to the department's earlier estimates because the district estimates were not consistent in terms of the time periods they covered or their completeness. Nevertheless, the department's estimates based on the older information were higher than the districts' estimates for six of the seven parks we reviewed, and some were significantly higher. Without updated and complete estimates of the costs to operate each park, it is difficult to accurately estimate the amount the department would save by closing a given park, and to measure the impact of partnership agreements that provide funding to help pay parks' operating costs and offset the effects of budget reductions.

RECOMMENDATIONS

To ensure that it reports consistent amounts to Finance and the State Controller, the department's budget office should develop and implement detailed procedures that describe how to use the year-end financial statements to report prior-year accounting information to Finance. These procedures should include steps to ensure that the ending fund balances reported in the most recent governor's budget and State Controller's budgetary report agree, and that the subsequent year's beginning fund balances in the governor's budget do not carry forward any differences.

The department's executive management should monitor the budget process closely to prevent any future variance from established policies and procedures designed to ensure accurate reporting.

To ensure transparency and accurate reporting, in those instances when Finance believes it is necessary to adjust amounts that departments have reported for presentation in the governor's budget, causing them to be different from the amounts reported to the State Controller, Finance should develop a policy and procedures to fully disclose the need for the adjustments it makes, including a reconciliation to the amounts reported by the State Controller.

To ensure that any significant changes affecting fund balances proposed by Finance for presentation in the governor's budget are presented accurately and transparently, the department should develop procedures to require higher-level review and approval of such changes by its chief deputy director, director, and potentially the secretary for the Natural Resources Agency. The department should identify levels of significance for the proposed changes in fund balances that would trigger seeking these higher-level approvals.

To ensure that it adheres to the statutory requirement to reduce services or close parks to achieve any required budget reductions in the future, the department should determine the amount necessary to fully operate its 278 parks at the 2010 level. Moreover, the department should document its calculations and ensure that they include all costs associated with the operation of parks in 2010.

To assure the Legislature and the public that future proposed park service reductions and closures are appropriate to achieve any required budget reduction, the department should develop individual park operating costs and update these costs periodically. These individual park costs should include all direct and indirect costs associated with operating the park, and the aggregated costs of all the individual parks should correspond with the related fiscal year's actual expenditures needed to operate the department's park system. Additionally, when proposing park service reductions or closures in the future, the department should compare the most recent cost estimates to the amount the department determines is necessary to fully operate its 278 parks at the 2010 level, to determine the actual amount of the reductions or closures needed.

AGENCY COMMENTS

The department concurs with and intends to implement our recommendations.

Finance indicated that it agrees with the report's recommendations.

1 According to the department's Web site, most parks charge day use fees for vehicle day use only; there is no charge to walk or bike into these parks. However, most historical parks and museums charge a day use fee per person.

2 Before including the effect of the $55 million reduction, the department's ending fund balance for the off-highway vehicle fund in the governor's budget would have been overstated by more than $20 million compared to the ending fund balance reported in the State Controller's budgetary report.

3 Although Finance initially proposed to move the additional funds to the Transportation Tax Fund, the legislation that was eventually enacted requires that the additional funds be transferred to the General Fund.

4 Although the deputy director of administration started working at that position in January 2012, in November 2012 he was appointed to the position of chief deputy director. Throughout this report we refer to him as the deputy director of administration, which was his title during most of our fieldwork.