Office of Management and Budget

August 17, 2001

MEMORANDUM FOR CHIEF FINANCIAL OFFICERS AND BUDGET OFFICERS OF EXECUTIVE DEPARTMENTS AND AGENCIES

FROM:	Joseph Kull Deputy Controller

SUBJECT:	Minimizing Erroneous Payments and Supplemental Guidance on Erroneous Payment Information to be Included in Fiscal Year 2003 Budget Submissions

Stewardship responsibility over public funds requires that all Federal agencies have appropriate policies and procedures to ensure the integrity of Federal program payments. The attachment contains a set of basic principles all Federal agencies should recognize when implementing their existing responsibilities to minimize erroneous payments.

The recent release of OMB Circular A-11, Preparing and Submitting Budget Estimates, contains a new section 57 requesting that, for certain specified programs, information on erroneous payments be included in the initial FY 2003 budget submissions of the affected agencies. You should review section 57 of OMB Circular A-11 to determine whether any of your agency's programs are identified and, if so, what information should be included in your budget submission. The basic principles contained in the attachment may also be useful when performing the assessment of current efforts to minimize erroneous payments required by OMB Circular A-11.

For each indirect program listed in Exhibit 57 of OMB Circular A-11 where erroneous payment rates are not currently estimated, agencies are required to determine whether and how erroneous payments could be estimated. This analysis should include an assessment of the costs and benefits of collecting new or additional data and should describe programmatic and legal obstacles to collecting additional data or establishing estimation procedures. Examples of the type of information to consider in your analysis include:

A description of the types of erroneous payments that could occur [e.g., administrative errors by payors (miscalculations, duplicate payments, etc.), errors by payees (i.e., incorrect or duplicate billings, etc.), and/or errors or fraud by program participants/beneficiaries/agency employees (under reporting of income, other false claims, etc.)], and

A description of the procedures that would be necessary to develop an estimate, including (i) the need for and type of action that would be required by non-Federal entities, (ii) the location of the information needed to develop the estimate (e.g., central Federal database, decentralized Federal field offices, States, other) and any practical or legal obstacles to obtaining access to the information, (iii) an estimate of the cost of implementing the procedures to develop an estimate, and (iv) any other information that you believe is relevant to making a decision on whether to begin developing estimates of erroneous payments for the program.

Additional information should be provided to support any conclusion that estimating erroneous payments is unnecessary or would not be cost-beneficial because (1) the program is not susceptible to significant erroneous payments, (2) the program has strong internal controls to prevent (or identify and correct in a timely manner) erroneous payments, (3) the program has not experienced an erroneous payment problem, and/or (4) the administrative or policy burden outweighs the benefit to be gained by developing estimates. Such information could include, as needed:

A description of the controls in place to prevent erroneous payments,
Statistical and descriptive information on audits and reviews conducted of program activities over the last 2 years and the results that support your conclusions (e.g., number of audits performed, number and types of findings, questioned costs), and
Explanation and description of data or evidence that additional emphasis on preventing or detecting erroneous payments would inhibit, to an unacceptable degree, achieving the objectives of the program or other national public purpose.

Your Office of Inspector General (OIG) has skills and institutional knowledge or specific data that may helpful to you in performing your analysis. You may want to enlist the OIG's help to support your conclusions.

Public reporting of progress in meeting goals for minimizing erroneous payments enhances accountability and we expect agencies to do so. As indicated in the basic principles (No. 6) in the attachment, this information can be reported in a variety of places, including, agency performance reports under the Government Performance and Results Act, annual financial reports, or regularly-issued stand-alone program reports.

For general questions on this guidance, contact George Rippey, Office of Federal Financial Management, Office of Management and Budget, phone (202) 395-3993, fax (202) 395-4915, e-mail grippey@omb.eop.gov. For guidance on application of this policy to specific programs, contact the appropriate Resource Management Office in OMB.

Attachment

Federal agencies should recognize the following fundamental principles relating to managing Federal benefit program payments:

Prevention is More Effective Than After-the-Fact Efforts

It is often very difficult or impossible to recover overpayments or correct underpayments after they occur. Effective procedures to ensure the integrity of payments before they are made is the most efficient and effective method for keeping erroneous payments to a minimum.

Program Payment Integrity is a Joint Management Responsibility

Senior leadership shall place appropriate resources and emphasis on the need to minimize the level of erroneous payments. Agency managers shall work together to assure that there is an adequate level of control to minimize erroneous payments. Inspectors General may assist agency leadership in identifying opportunities to strengthen controls and in assessing the agency's progress in improving payment integrity.

Erroneous Payments Should be Kept to the Lowest Practical Level

In any program, some level of erroneous payments is unavoidable; the goal is to keep them to the lowest practical level, given the circumstances of the program. Zero erroneous payments would be the ultimate goal; however, there are other considerations that make such a goal unrealistic. For Federal programs, erroneous payments are similar to shoplifting and obsolescence in the retail industry, and spoilage in the agriculture and food industries. In these industries, such occurrences are a recognized cost of doing business, and efficient management strives to keep these costs within tolerable levels.

Balance With Program Goals and Other Competing Priorities

The goal of minimizing erroneous payments shall be balanced against the need to achieve the objectives of the program and the objectives of other national priorities. Often, Federal program goals emphasize providing benefits timely to all eligible beneficiaries and protecting individual privacy. Meeting these goals may require accepting a higher level of payments to ineligible recipients and fewer controls. Federal agencies should consider consulting and working with program stakeholders, including those involved in program and agency oversight, program administration, and program creation, when designing internal controls to minimize the level of erroneous payments.

Controls Should Take Into Account Both the Benefits and Costs

The cost of procedures to minimize or collect erroneous payments should not exceed the benefit to be gained. Consideration shall be given to the administrative burden not only at the Federal level, but also on program beneficiaries, grantees (e.g., States and local governments administering Federal programs), and other third parties administering a program.

Performance Measurement and Reporting Provides Better Accountability

Periodically and consistently estimating the rate of erroneous payments enables agencies to measure progress over time and determine whether further action is needed to minimize future improper payments. This is true even if, as is frequently the case in error estimates, erroneous payments projected from a sample may not be recoverable. Public reporting of progress enhances accountability. Agency performance can be reported in a variety of places, including reporting under the Government Performance and Results Act, annual financial reports, or regularly-issued stand-alone program reports.

Data Verification Strengthens Program Payment Integrity

When practical and permitted by law, agencies shall verify key information supporting benefit payments with information maintained internally and by others. Conversely, agencies shall share data that can be used to prevent or identify improper payments. Data sharing and use of data shall be consistent with relevant laws and with OMB Memorandum M-01-05, Guidance on Inter-Agency Sharing of Personal Data - Protecting Personal Privacy (available on the OMB website at /OMB/memoranda/m01-05.html).

Impediments to Effective Controls May Exist and Should Be Considered

Periodic assessments may identify statutory and other impediments to improving payment integrity. Agencies should determine if such impediments can and should be removed by the agency and, if so, promptly take action to remove them. Agencies should consult with stakeholders about these impediments as well as impediments that cannot be removed by agency action alone.