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California DOC Substance-Abuse Contractor Audits Reveal $5 Million in Overcharges
California?s Inspector General (IG), the state?s overseer of the California Department of Corrections and Rehabilitation (CDCR), discovered $5 million in past overcharges from three substance-abuse treatment contractors, plus $258,250 in overstated expenses and chronic illegal retention of CDCR property after completion of the contracts. Corrections Secretary James Tilton responded to the IG?s report by taking immediate corrective action to recover all such owed funds.
CDCR?s Office of Substance Abuse Programs budgets $143 million annually, $60 million of which is paid to outside non-profit contractors. The IG reviewed three of these contractors? billings versus their actual associated expenses for the fiscal years ending in 2001 through 2004. In FY 2001, Mental Health Systems, Inc. (MHS), a San Diego based contractor, billed $17,612 in such excesses. In the following periods, MHS billed excesses of $93,989, $338,068 and $81,538. Walden House, Inc. was cited for excess billings of $230,233, $501,726, $705,027 and $406,882, respectively. The third firm, WestCare, led the pack with $449,503, $1,105,826, and $1,060,743 for the first three periods. The matter was deemed urgent by the IG because the contracts provided for a three-year limitations period for CDCR to review discrepancies. For the earliest periods, this would expire by December 31, 2006.
The IG determined that the excesses went undetected because CDCR did not compel these contractors to perform contract-required reconciliations. While the contracts provided initially that the contractors bill on a fee-for-service basis grounded in standard rates, they also required periodic reconciliation to the actual costs incurred. If the latter were less, the difference was to be refunded. The audit period ended with FY 2004 because CDCR changed the contract language thereafter to only permit an actual-cost reimbursement basis.
Nonetheless, this did not end abuses. The IG noted that MHS had expensed the purchase of 22 cars in their year of purchase, rather than using the customary five-year depreciation schedule. This distorted their cost reimbursement charges by $258,250 over the four year audit period. The IG objected, asking that the costs be recalculated based upon standard accounting principles and that the $258,250 be refunded.
Another chronic abuse was the contractors? retention of purchased equipment after the contract was over. California?s budget guide permits contractors to retain ?expendable? equipment whose acquisition cost was less than $5,000. The IG noted that this process, which permitted contractor Phoenix Houses of California, Inc. to keep numerous computers, television sets and fax machines at the end of its Corcoran State Prison substance abuse contract, violates California?s constitution, Section 6, Article XVI [prohibiting gifting of public money for any private purpose] as well as the State Contracting Manual, section 7.29. The IG chastised CDCR for including such an illegal equipment-retention clause in its contracts, requested that it be deleted, and referred recovery efforts to the State Attorney General. The three reviewed contractors had a total of $1.1 million of such equipment expenses, but the IG was unable to identify costs for returnable ?expendable equipment? versus mere ?normal supplies.? The IG noted that statewide, CDCR had contracts of $2.6 billion, leaving prospects for abuse at a staggering uncounted number of millions of dollars. In sum, it appears that while the prisoners may have been on drugs, their contract substance-abuse counselors? accountants were on steroids.
As a final insult, the IG noted that confidential record information from Phoenix House?s contract at Corcoran State Prison had been improperly discarded in a nearby business?s dumpster. But because Corcoran?s Investigative Services Unit was ?deficient? in investigating this incident, and all parties denied responsibility, the matter was dropped. One can only wonder if such indifference would have been accorded to similar records mishandling of staff confidential data. See: Office of the Inspector General, Special Review Into Concerns Related To Substance Abuse Treatment Contractors, October 2006.
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