The Office of Inspector General (OIG) conducted an audit to determine whether controls over the use of expired funds for procurements to maintain VA healthcare facilities were effective. The audit assessed whether Veterans Health Administration (VHA) obtained proper approval to use expired funds as well as whether contract changes were within the scope of the original contracts. In addition, the audit determined if contract changes were executed and funded in accordance with acquisition and appropriations law and regulations.

The audit identified unapproved and improper use of expired funds in at least 80 percent of Veterans Integrated Service Network (VISN) contracting activities nationwide amounting to a total of $16.4 million during fiscal year (FY) 2007. This widespread improper use of expired funds occurred primarily because of a lack of policy clarity and other weaknesses in internal controls. While VHA has taken steps to centralize the process to track and approve the use of prior-year funds, it needs to clarify relevant policies and further strengthen controls over these funds. In addition, appropriate administrative action is needed to address personnel who improperly awarded new contracts using expired appropriations.

In May 2007, the OIG substantiated a complaint that officials in Boston improperly used expired appropriations. A series of out-of-scope modifications to maintenance contracts were in violation of Federal law. This audit was initiated to determine whether appropriation and procurement issues previously identified by the OIG at the Boston Healthcare System occurred at other locations.

Federal appropriations law provides the balance of an appropriation is available only for payment of expenses properly incurred during the period of availability or to complete contracts properly made within that period of availability (31 U.S.C. §1502). For contract changes, a bona fide need exists when the need for a change arises from an antecedent liability in the original contract that is enforceable by the contractor. An appropriation is considered to have "expired" after the period when it was available for new obligations has passed. In VA, approval from the Secretary or his designee, the Assistant Secretary for Management, is necessary for obligations from expired accounts that exceed a cumulative total of $4 million in a fiscal year within a program, project, or activity (31 U.S.C. §1553(c), 38 C.F.R. §2.6(c)(2)).

Procurements to maintain VA healthcare facilities are funded with an annual Medical Facilities Appropriation. VA maintenance activities include the Non-Recurring Maintenance (NRM) construction program. This program involves capitalized projects controlled at the VISN level involving replacement and repair of major building systems; structural components of buildings, building service equipment, maintenance and repair of roads, grounds, and structures; and site preparation necessary to support installation of replacement medical equipment. Contracting activities for VHA field stations are also operated at the VISN level.

In 1999, VHA issued a policy that assigned contracting officers the responsibility to determine whether contract changes are within the scope of the original contracts and whether the changes may be charged to an expired appropriation. The 1999 policy permitted VISN fiscal officers to approve the use of expired funds up to a threshold of $4 million. Once the cumulative threshold was reached, VHA needed to obtain approval for additional obligation authority from the Assistant Secretary for Management. The VHA Chief Financial Officer was responsible for monitoring the obligation of expired funds to determine when approvals from the Assistant Secretary became necessary.

VHA permitted expired funds to be used without necessary approval to fund new contracts and for contract changes that were out-of-scope and did not meet a bona fide need of the appropriation year. A total of $16.4 million in unapproved or improper use of expired funds in transactions during FY 2007 and in the original procurements from prior years were associated with these transactions.

Widespread unapproved and improper use of expired funds was possible because VHA had not established effective internal controls to ensure compliance with statutory restrictions regarding how they were used. Furthermore, the lack of internal controls prevented an accurate assessment of the total amount of funds at risk.

VHA Used Expired Funds without Required Approvals. VHA officials did not obtain approvals required by law for obligations of expired funds after cumulative obligations in FY 2007 necessitated a requirement for approvals by the Secretary. We projected that VHA improperly obligated $6.5 million in expired funds without obtaining legally sufficient approvals to obligate expired funds for 410 (43.5 percent) of 942 contract modifications between the period April 27 through September 30, 2007. We determined that the NRM program spent $4 million in expired FY 2006 funds by April 27, 2007, based on a combination of our sample data and VHA finance records. By law, VHA was authorized to obligate up to $4 million in expired funds without obtaining higher approval. However, upon exceeding this threshold, each additional obligation of expired funds required approval from the Secretary or his designee (31 U.S.C. §1553(c)).

Then in August 2007, VHA obtained approval "to use" $1.8 million in additional expired funds from the Secretary’s designee, the Assistant Secretary for Management, to cover an estimate of total expired funds needed for the remainder of the fiscal year. The Assistant Secretary for Management told VHA he approved the use of $1.8 million in expired funds for contract changes. However, the request for his approval did not contain sufficient information to approve the use of expired funds for specific obligations or purposes, as the law required, and the approval did not fulfill the legal requirement to approve individual obligations.

VHA Used Expired Funds for Additional Work Not Required in Original Contracts. VHA used expired funds to perform additional work that was out-of-scope of the original contract and/or did not arise based on an antecedent liability in the original contract, that is, a bona fide need. We estimated officials used expired funds for 285 obligations in 2007 valued at $3.6 million in this category.

VHA Funded New Contracts with Expired Funds. Contracting officers improperly awarded new contracts with expired funds or funded modifications with appropriations that had expired prior to the original award. As a result, we estimated that a total of 52 obligations in 2007 valued at $3.1 million were made with appropriations that had expired before the original contracts were awarded. Furthermore, in six of these procurements, contracting officers improperly used an additional total of $5.8 million in expired funds prior to FY 2007.

VHA Needed to Strengthen Internal Controls over Expired Funds. VHA internal controls over the use of expired funds needed strengthening to ensure compliance with Federal appropriations law. VHA did not ensure that cumulative contract changes exceeding $4 million received necessary approval, in part, because it lacked an accurate method to track such changes. In addition, it did not submit the requests for changes that exceeded the $4 million limit to the Assistant Secretary for Management before allowing VHA facilities to obligate the funds.

VHA Needed to Clarify Policy. VHA field personnel made erroneous decisions to use expired funds, in part, because VHA policy did not clearly explain appropriation law requirements. Although VHA policy required the contracting officer to make a determination whether the modification is within the general scope of the contract, this was just one criterion that must be considered in making a bona fide needs determination that allows the use of expired funds to pay for any increase in cost. The contracting officer must also determine whether the upward price adjustment is attributable to an antecedent liability—whether the Government’s liability arises and is enforceable under a provision in the original contract. The use of expired funds for new contracts occurred because fiscal employees recorded obligations based on inaccurate entries created by contracting officers in the electronic procurement accounting system during year-end spending, rather than verifying acceptable obligation documentation.

VHA Making Improvement Efforts. VHA revised its expired funds directive for the NRM program in April 2008 to increase centralized control. Further action was needed to ensure that each request to obligate expired funds above the $4 million threshold is submitted to the Assistant Secretary for Management for approval. In addition, VHA was monitoring cumulative contract changes using expired funds for NRM projects only, whereas the law requires monitoring and controlling contract changes in all programs, projects, and activities funded with appropriations with specific time limitations.

VHA policies needed to be clarified, controls strengthened, and personnel held accountable regarding the appropriate use of expired funds. The improper use of expired funds was widespread within the NRM program during FY 2007. VHA used expired funds without approval or for improper purposes in at least 80 percent of VISN contracting activities nationwide. The audit identified $16.4 million in improperly used or unapproved expired funds for FY 2007 transactions and in the original procurements from prior years associated with these transactions. This amount included a $2.6 million adjustment to eliminate duplication in our projections for transactions having more than one exception.

Expired funds were used improperly because VHA had not provided clear policies or implemented effective internal controls over them, including an effective approval process. VHA did not have a satisfactory process in place to track the use of expired funds and obtain higher level approvals when required. VHA policy erroneously implied that an in-scope contract modification necessarily represented a bona fide need of the year when the original funding was available. In addition, VHA improperly recorded obligations for contracts that were not awarded until after the appropriations had expired. This occurred, in part, because fiscal employees recorded obligations without reviewing obligation documentation. All of these issues needed to be addressed to ensure proper obligation and use of millions of VA appropriation dollars.

The Under Secretary for Health agreed with our findings, recommendations, and estimated monetary benefits. The Under Secretary said that revisions to VHA policies during the audit improved controls concerning the use of prior-year funds for NRM maintenance and that the recent reorganization of VHA’s procurement oversight responsibilities would further enhance relevant controls. He also agreed to initiate additional policy revisions needed to address issues presented in the report. He stated that, under new procedures, requests to use prior-year funds and related obligation records would be reconciled quarterly and requests to use expired funds will be required to address the legal justification issues we identified.

The Under Secretary said that financial and acquisitions staff would receive appropriate training on revised VHA policies and appropriation law. VHA would consult with the Assistant Secretary for Management to develop plans to implement controls over the use of prior-year funds in other VHA activities. The Under Secretary’s action plan provided that VHA would implement appropriate procedures to verify obligations recorded during year-end spending, take action regarding contracting officers who misused prior-year funds, and make appropriate accounting adjustments to correct funding issues identified in the report. (See Appendix C for the full text of the Under Secretary’s comments and action plan.)

We consider the planned actions acceptable and will follow up on their implementation.