The state Department of Labor has overspent about $7 million in federal funds over the past few years, apparently the result of human error, according to a special audit of the department’s federal funds.

“To the best of our determination, this is a case of incompetence at the staff level,” State Auditor Mike Foley said Thursday.

The audit did not find evidence of impropriety or fraud, Foley added.

The department has already reduced spending to handle at least a part of the overspending. Those steps include not filling about a dozen positions, making a “minor” layoff, halting out-of-state travel, delaying purchases and shelving some information technology programs, said John Albin, agency legal counsel.

The department hopes the spending slowdown will take care of the funding disparity and the agency will not have to repay any money, Albin said.  

The agency actually had errors involving almost $100 million in federal funds, according to Foley.

Foley’s staff calculated the department had underspent federal funds by about $45 million and overspent by about $52 million since 2003.

The difference was $6.86 million in overspending, Foley said.  The spending errors occurred in 20 grant programs, according to Foley’s special evaluation.

The agency generally receives $38 million to $40 million a year in federal funds. More than 90 percent of the department funding comes from federal grants and programs.

“The accounting errors represent a complete meltdown in the agency’s fiscal reporting that led senior officials at the state Department of Labor to believe their federal spending of federal funds was in line with funds authorized amount,” according to the auditor’s report. 

“In reality, the department was overspending at the approximate rate of 3.5 percent per year which has now accumulated to millions of dollars and renders the state liable for repayment,” according to the report.

Similar problems could be occurring in other agencies, Foley said. So his staff will be looking at federal funds in other state agencies.

Foley also criticized the agency’s decision to settle with Kay Marti, the executive director of finance.

Marti was fired in mid-March.  She hired an attorney and the agency later agreed to a settlement that puts Marti on leave until July 21, allowing her to reach the state’s retirement age and receive $17,000 in additional sick leave compensation, according to Foley’s report.

Marti, who refused to be interviewed by Foley’s staff, is ultimately responsible for the accounting problems, Foley said.  

Marti responded to Foley’s accusation Thursday evening saying, “when politicians choose to publicly discredit hard-working state employees who may or may not have made mistakes, I believe it is like kicking them in the gut.

“There were people in the department desperately trying to understand what went wrong and working day and night to do so,” she said in an e-mail.

Marti also defended the settlement allowing her to get retirement benefits, pointing out that she had worked 25 years for the state. “I loved working for state government.  I do not like politics.”

 The issues described in the report are complex, but at the heart of the problem was the failure of labor department accountants to properly allocate and match all costs and expenditures of individual federal grant awards with the available funds for each grant, Foley said in a news release. 

When expenditures exceeded available funds for particular grants, money from other federal grants was used to cover the overspending. This process was repeated across 20 separate programs over multiple years, he said. 

The auditor’s staff looked at grants beginning in 2003, but the errors could go back to the early 1990s, according to the report. 

The situation was complicated  by multiple accounting systems.

The agency used three different accounting system over the years, and none reconciled with each other, Foley said.

Though there was apparently no fraud, Foley said he is concerned agency accountants were aware of problems for 10 months before they disclosed the problems to the state’s accountant or to the state auditor.

The agency received an e-mail on May 2, 2007, from the federal government showing Employment Services and Unemployment Insurance administration grants were overdrawn by $8.19 million.

But agency leaders didn’t notify Foley about the potential problems until March 2008. 

In addition, agency leaders signed a letter in December 2007 certifying they had turned over all information about any deficiencies in financial reporting practices to the auditor’s office. 

Labor Commissioner Fernando “Butch” Lecuona told Foley’s staff he didn’t know about the memo until March 2008, according to the report. 

“We certainly regret that the commissioner did not know that e-mail existed when he certified” that the agency had provided all the information, Albin said.

The problem turned out to be larger than the agency expected.

The agency knew earlier in the year of a $4.9 million problem. 

The auditor’s office uncovered another $1.9 million error, Albin said.

“We’ve been mindful of the problem and have been trying to reduce spending,”  Albin said.

The auditor’s report also places some responsibility on his own office, saying the auditor’s office should have made certain the department had fixed reconciliation problems uncovered in two previous audits. 

In this special audit, Foley said his staff had to meticulously re-build years of federal grant transactions in order to determine the extent of the problem — a tedious process that took a team of auditors nearly 10 weeks to complete.

Reach Nancy Hicks at 473-7250 or nhicks@journalstar.com.